WSJ EUROPE NEWS JANUARY 14, 2012, 6:01 P.M. ET
S&P Defends Ratings Cuts as France, Germany Stay the Course
By GEOFFREY T. SMITH, GABRIELE PARUSSINI and NADYA MASIDLOVER
Standard & Poor's analysts on Saturday defended their downgrades of more than half of the euro zone's 17 members, as the highest-profile victim of the mass ratings cut—France—looked to play down the impact.
In a conference call hours after the downgrades, S&P analysts said they stood by their moves as they believe the euro zone's policy response to the debt crisis has been largely misguided and is building up future risks.
"The proper diagnosis would have to give more weight to the ... rising imbalances in the euro zone," said Moritz Kramer, head of European sovereign ratings. He pointed to problems such as divergences in competitiveness from one country to another, which he said is reflected in huge imbalances in national
current accounts.
Mr. Kramer said the centerpiece of a December summit aimed at arresting the crisis, the adoption of tighter fiscal rules to avoid excessive deficits, "wouldn't have identified the risks" in advance as Germany had one of the largest budget deficits of all during the first 10 years of the euro's existence, whereas Spain, which is a problem area now, had a largely balanced budget.
German chancellor Angela Merkel on Saturday called for speedy implementation of euro-zone proposals to address the debt crisis.
But Mr. Kramer stressed that S&P isn't calling for more fiscal stimulus from the countries with the biggest debt problems, saying that they have neither the room, nor enough credibility in the debt markets, to try to spend their way out of trouble.
"That certainly wouldn't be regarded as a credit positive, not by our metrics at least," Mr. Kramer said.
The call came a day after S&P downgraded more than half of the currency bloc's 17 sovereign nations. In doing so, it became the first credit-rating firm to strip France and Austria of their triple-A ratings, and cut Portugal and Cyprus to junk status.
Meanwhile, French Prime Minister Francois Fillon said Saturday that the government would press on with planned overhauls but wasn't considering fresh austerity measures.Mr. Fillon sought to play down the downgrade in front of anxious voters, who will cast their ballot to pick the next president in 99 days. "This decision is an alert which should not be dramatized, but should not be underestimated either," he said.
The downgrade, which is likely to impose higher borrowing costs on the euro zone's second-largest economy, landed a hard blow on President Nicolas Sarkozy, who had positioned himself as the defender of the country's financial standing during Europe's sovereign-debt crisis.
Countries react to the "Black Friday" announcement of nine credit rating downgrades in the euro zone by Standard & Poor's agency.
Mr. Sarkozy justified efforts to push through unpopular programs—a pension overhaul and deficit-cutting austerity measures—as necessary to defend France's triple-A rating, which it had held since 1975. Other overhauls, aimed at increasing the country's competitiveness and stemming the shift of industrial jobs abroad, are scheduled to be discussed and possibly adopted by the end of the month.
S&P's decision to leave Germany's triple-A rating unchanged exposed a deepening gulf between Paris and Berlin, with France looking increasingly incapable of holding up to Germany and politically weaker in the tough negotiations to resolve the euro-zone crisis.
Mr. Sarkozy and German Chancellor Angela Merkel have held themselves up as the main driving force steering the EU through the debt crisis, presenting other EU countries with compromise solutions that Paris and Berlin had agreed upon ahead of key EU meetings.
France has often counted on the support of southern nations, including Italy, to counterbalance Germany's calls for fiscal orthodoxy, a stance backed by the Netherlands and Finland—both triple-A rated countries.
Mr. Fillon denied that the ratings downgrade would skew the negotiating balance in favor of Germany. "There's no reason our relationship should change," he said. "The destinies of France and Germany are completely linked."
For her part, Mrs. Merkel on Saturday told reporters the S&P ratings downgrades underscore that euro-zone nations must accelerate efforts to implement a closer fiscal union and to set up a permanent bailout facility, the European Stability Mechanism. The ESM, scheduled to start on July 1, should start "as soon as possible" because this is important for investors' confidence, the German leader said.
She said that the downgrades weren't a full surprise and dismissed concerns that they would harm the euro's temporary bailout facility, the European Financial Stability Facility, by making it more difficult for the fund to borrow. "This won't torpedo the work of the EFSF," she said.
While Germany retained its triple-A credit rating, Mrs. Merkel said, "I don't believe that the downgrade has any influence at all on Germany having to do more than others. Instead, we must broaden the basis of our rescue facilities, which we can only do with the ESM because all countries will provide cash" for the facility.
Mrs. Merkel also said she was open to ideas to change legislation that would allow financial players to be less dependent on rating firms' assessments, given insurers' obligation to purchase sovereign bonds with triple-A ratings.
"This is generating a self-reinforcing effect," she said. "That's why I believe it would be very useful to look into it and think about possible legal changes. I support this approach." She referred to a proposal made earlier Saturday by a lawmaker in her party. Michael Meister, a lawmaker with the Christian Democratic Union, said new legislation was needed that would require banks and insurers to provide their own ratings on
their investments instead of relying on rating firms.
Meanwhile, S&P's Mr. Kramer identified a number of near-term risks for the region, highlighting the apparent breakdown of talks between Greece and its private-sector creditors. He said that Greece's debt burden has to be cut, and warned that a disorderly default could shake market confidence, making it
harder for countries to keep rolling over maturing debt. Italy alone has to refinance more than €130 billion of debt between February and April, he said.
Mr. Kramer said S&P still believes that Greek bondholders could hope to recover between 30 and 50 cents on the euro, but said the likeliest outcome was toward the bottom of that range.Also in the call, Mr. Kramer was critical of the euro zone's bailout vehicles, saying that the European Stability Mechanism appeared set up to act as a preferred creditor, subordinating all current holders of euro-zone bonds in the event of a debt
restructuring.
—Andrea Thomas contributed to this article.
Source: Wall Street Journal
S&P Defends Ratings Cuts as France, Germany Stay the Course
By GEOFFREY T. SMITH, GABRIELE PARUSSINI and NADYA MASIDLOVER
Standard & Poor's analysts on Saturday defended their downgrades of more than half of the euro zone's 17 members, as the highest-profile victim of the mass ratings cut—France—looked to play down the impact.
In a conference call hours after the downgrades, S&P analysts said they stood by their moves as they believe the euro zone's policy response to the debt crisis has been largely misguided and is building up future risks.
"The proper diagnosis would have to give more weight to the ... rising imbalances in the euro zone," said Moritz Kramer, head of European sovereign ratings. He pointed to problems such as divergences in competitiveness from one country to another, which he said is reflected in huge imbalances in national
current accounts.
Mr. Kramer said the centerpiece of a December summit aimed at arresting the crisis, the adoption of tighter fiscal rules to avoid excessive deficits, "wouldn't have identified the risks" in advance as Germany had one of the largest budget deficits of all during the first 10 years of the euro's existence, whereas Spain, which is a problem area now, had a largely balanced budget.
German chancellor Angela Merkel on Saturday called for speedy implementation of euro-zone proposals to address the debt crisis.
(Video: Reuters/Photo: AP)
But Mr. Kramer stressed that S&P isn't calling for more fiscal stimulus from the countries with the biggest debt problems, saying that they have neither the room, nor enough credibility in the debt markets, to try to spend their way out of trouble.
"That certainly wouldn't be regarded as a credit positive, not by our metrics at least," Mr. Kramer said.
The call came a day after S&P downgraded more than half of the currency bloc's 17 sovereign nations. In doing so, it became the first credit-rating firm to strip France and Austria of their triple-A ratings, and cut Portugal and Cyprus to junk status.
Meanwhile, French Prime Minister Francois Fillon said Saturday that the government would press on with planned overhauls but wasn't considering fresh austerity measures.Mr. Fillon sought to play down the downgrade in front of anxious voters, who will cast their ballot to pick the next president in 99 days. "This decision is an alert which should not be dramatized, but should not be underestimated either," he said.
The downgrade, which is likely to impose higher borrowing costs on the euro zone's second-largest economy, landed a hard blow on President Nicolas Sarkozy, who had positioned himself as the defender of the country's financial standing during Europe's sovereign-debt crisis.
Countries react to the "Black Friday" announcement of nine credit rating downgrades in the euro zone by Standard & Poor's agency.
Mr. Sarkozy justified efforts to push through unpopular programs—a pension overhaul and deficit-cutting austerity measures—as necessary to defend France's triple-A rating, which it had held since 1975. Other overhauls, aimed at increasing the country's competitiveness and stemming the shift of industrial jobs abroad, are scheduled to be discussed and possibly adopted by the end of the month.
S&P's decision to leave Germany's triple-A rating unchanged exposed a deepening gulf between Paris and Berlin, with France looking increasingly incapable of holding up to Germany and politically weaker in the tough negotiations to resolve the euro-zone crisis.
Mr. Sarkozy and German Chancellor Angela Merkel have held themselves up as the main driving force steering the EU through the debt crisis, presenting other EU countries with compromise solutions that Paris and Berlin had agreed upon ahead of key EU meetings.
France has often counted on the support of southern nations, including Italy, to counterbalance Germany's calls for fiscal orthodoxy, a stance backed by the Netherlands and Finland—both triple-A rated countries.
Mr. Fillon denied that the ratings downgrade would skew the negotiating balance in favor of Germany. "There's no reason our relationship should change," he said. "The destinies of France and Germany are completely linked."
For her part, Mrs. Merkel on Saturday told reporters the S&P ratings downgrades underscore that euro-zone nations must accelerate efforts to implement a closer fiscal union and to set up a permanent bailout facility, the European Stability Mechanism. The ESM, scheduled to start on July 1, should start "as soon as possible" because this is important for investors' confidence, the German leader said.
She said that the downgrades weren't a full surprise and dismissed concerns that they would harm the euro's temporary bailout facility, the European Financial Stability Facility, by making it more difficult for the fund to borrow. "This won't torpedo the work of the EFSF," she said.
While Germany retained its triple-A credit rating, Mrs. Merkel said, "I don't believe that the downgrade has any influence at all on Germany having to do more than others. Instead, we must broaden the basis of our rescue facilities, which we can only do with the ESM because all countries will provide cash" for the facility.
Mrs. Merkel also said she was open to ideas to change legislation that would allow financial players to be less dependent on rating firms' assessments, given insurers' obligation to purchase sovereign bonds with triple-A ratings.
"This is generating a self-reinforcing effect," she said. "That's why I believe it would be very useful to look into it and think about possible legal changes. I support this approach." She referred to a proposal made earlier Saturday by a lawmaker in her party. Michael Meister, a lawmaker with the Christian Democratic Union, said new legislation was needed that would require banks and insurers to provide their own ratings on
their investments instead of relying on rating firms.
Meanwhile, S&P's Mr. Kramer identified a number of near-term risks for the region, highlighting the apparent breakdown of talks between Greece and its private-sector creditors. He said that Greece's debt burden has to be cut, and warned that a disorderly default could shake market confidence, making it
harder for countries to keep rolling over maturing debt. Italy alone has to refinance more than €130 billion of debt between February and April, he said.
Mr. Kramer said S&P still believes that Greek bondholders could hope to recover between 30 and 50 cents on the euro, but said the likeliest outcome was toward the bottom of that range.Also in the call, Mr. Kramer was critical of the euro zone's bailout vehicles, saying that the European Stability Mechanism appeared set up to act as a preferred creditor, subordinating all current holders of euro-zone bonds in the event of a debt
restructuring.
—Andrea Thomas contributed to this article.
Source: Wall Street Journal
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