Merkel downplays possible S&P downgrade

[December 06, 2011]  BERLIN (AP) -- Chancellor Angela Merkel on Tuesday downplayed Standard & Poor's warning that it might cut the credit rating of 15 eurozone countries, including Germany's, because the region's financial crisis is worsening without any imminent fix.

The timing of the warning was noteworthy. It came just hours after Merkel and French President Nicolas Sarkozy urged changes to the European Union treaty that would centralize decision-making on spending and borrowing for the 17 countries that use the euro. Tighter political and economic coordination among euro countries is seen as a precursor to further financial aid from the European Central Bank, the International Monetary Fund, or some combination.

The threat to cut Germany's prized AAA rating was particularly surprising. Its bonds are considered among the safest in the world. A downgrade threatens to complicate the eurozone's bailout mechanism, since the region's rescue fund relies on AAA-rated bonds of Germany and France to cheaply raise money.

Investors nevertheless seemed to take the S&P warning in stride on Tuesday. European stocks and bonds mostly held onto the gains they made Monday.

"What a rating agency does is the responsibility of the rating agency," Merkel told reporters in Berlin, refusing to elaborate further.

She said, however, that she expected a meeting of European leaders later this week in Brussels would help restore markets' confidence.

"We will meet on Thursday and Friday as Europeans and take those decisions that we consider to be correct, and through them stabilize the eurozone and also regain confidence," she said.

She and Sarkozy on Monday outlined sweeping plans to change the EU treaty in an effort to keep tighter checks on overspending nations. The proposal is set to form the basis of discussions at an EU summit in Brussels on Friday.

The financial markets of Italy and Spain rallied after Merkel and Sarkozy unveiled their proposals, suggesting investors are more confident Europe can survive the crisis.

"I have always said this is a long process and an arduous one and it will continue, but we charted the course yesterday with the French president and we will continue to stay the course," Merkel said.

S&P said there was a 50 percent chance that the countries' ratings it put on review would be downgraded.

Late Monday night the euro fell from $1.3460 to $1.3330, unwinding much of the gains made after Merkel and Sarkozy's proposals. By Tuesday, however, it was back up to $1.3420.

Stock and bond markets largely overlooked S&P's threat, remaining stable on Tuesday. The bond yields for countries like Italy and Spain remained at the one-month lows they hit on Monday.

"Although the S&P warning has not scared the markets as it was pretty much stating the obvious, it did color the market sentiment," said Anita Paluch, a trader with Gekko Global Markets.

Paluch said the warning does raise pressure on policymakers, however, to use the upcoming summit to produce a solution that will "put out the fire in the eurozone."

Sarkozy and Merkel are proposing several broad changes for the EU treaty, including the introduction of a penalty for any government that allows its deficit to exceed 3 percent of gross domestic product. The penalty would be automatic -- unless a majority of nations opposed it, a loophole that drew sharp criticism from analysts.

Some analysts also feel the proposal, which demands strict austerity measures, misses the mark completely and will only worsen already feeble economies like Greece by making it impossible to borrow money and repay loans.

Investors are hoping that the summit of European leaders on Thursday and Friday will produce concrete measures to prevent a messy breakup of the euro. Markets have been jittery because of fears that the euro might disintegrate, causing a sharp recession in Europe that would spread through the world economy.

The S&P warning left out only two of 17 countries that use the euro: Cyprus, whose bonds have near-junk status, and Greece, whose low ratings already suggest it is likely to default soon anyway.

[Associated Press; By DAVID RISING]

Kirsten Grieshaber contributed to this story.

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