Euro zone warned of credit downgrade


Efforts to stabilise Europe’s financial crisis were thrown into disarray tonight as countries that use the euro braced for a possible downgrade of their credit ratings.

The leaders of France and Germany sought to restore confidence in the troubled European currency during the day with a joint call for changes to the European Union treaty so that countries using the euro would face automatic penalties if budget deficits ran too high.

Stock prices rose and borrowing costs for European governments dropped sharply in response to the changes proposed by French president Nicolas Sarkozy and German chancellor Angela Merkel.

They said their proposals would prevent the kind of out-of-control spending and borrowing that led to the debt crisis that is engulfing Europe and threatening the global financial system.

Standard & Poor’s confirmed the threat to downgrade the credit rating of 15 eurozone countries tonight, saying the worsening debt crisis is affecting the bloc’s strongest economies.

The decision to put 15 eurozone countries, including AAA-rating nations such as Germany and Luxembourg, on watch for a possible downgrade piles pressure on euro zone leaders to find a solution to the currency union’s debt troubles.

S&P said its decision was “prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole”.

The only two euro nations not put on credit watch were Cyprus, which was already under review, and Greece, which already holds the world’s worst rating.

The threat to downgrade the euro zone countries — including the ones that enjoy the AAA-rating — comes ahead of a crucial summit of EU leaders later this week. If there is widespread support at the summit, it is assumed that would be an important first step in bringing an end to the crisis, which has dragged on for more than two years.

“Our wish is to go on a forced march toward re-establishing confidence in the eurozone,” Mr Sarkozy said at a news conference in Paris, with Dr Merkel at his side. “We are conscious of the gravity of the situation and of the responsibility that rests on our shoulders.”

Mr Sarkozy pledged to have a revised EU treaty ready for signing by March. It would then need to be ratified in each country, which could mean lengthy parliamentary debates or national referendums in some cases.

No EU leaders came out against the Franco-German proposals, but no strong statements in favour were immediately forthcoming. The reaction from Austrian finance minister Harald Waiglein was fairly typical: “There is nothing here that contradicts our position,” although more details are needed, he said.

Mr Sarkozy said he and Ms Merkel would prefer that the treaty changes they are proposing be agreed by all 27 members of the EU. But he left the door open to an agreement only among the 17 euro countries and anyone else “who wants to join us”.