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BERLIN: Standard & Poor's has warned it may carry out an unprecedented mass downgrade of euro zone countries, including Germany and France, if EU leaders fail to deliver a convincing agreement on how to solve the region's debt crisis in a summit on Friday.
The ratings warning sent markets reeling and drew a rebuke from Eurogroup Chairman Jean-Claude Juncker, who said he was “astonished” by S&P's statement, describing it as “a wild exaggeration and also unfair.”
The agency's warning it may downgrade 15 countries came hard on the heels of a Franco-German initiative to enforce budget discipline across the 17 member zone through EU treaty changes.
President Nicolas Sarkozy and Chancellor Angela Merkel told reporters that their plan, to be discussed at Friday's summit , included automatic penalties for states that fail to keep deficits under control, and an early launch of a permanent bailout fund for euro states in distress.
They said they wanted treaty change to be agreed in March and ratified after France wraps up presidential and legislative elections in June. “We need to go fast,” Sarkozy said.
US Treasury Secretary Timothy Geithner arrives on Tuesday to add the pressure on European policymakers to convince markets they have a viable plan to stabilise the euro zone's debt-ridden countries.
Meetings at the European Central Bank in Frankfurt and with Germany's finance minister in Berlin kick off Geithner's fourth visit to the continent since September, underlining Washington's interest in averting a euro zone meltdown and its worries about Europe's woes weighing down the US and the global economy.
Italy, the biggest euro zone nation in trouble, offered a glimmer of hope that the bloc could halt a crisis that is threatening the survival of the common currency. Its borrowing costs tumbled after its new technocrat government announced an austerity program. S&P's statement made no mention of that program, and French Finance Minister Francois Baroin said it did not take into account Sarkozy and Merkel's announcement. He said France for its part did not plan to expand the austerity measures it had already announced.
“I am not unsettled by this,” Juncker told German radio on Tuesday. “But I am astonished after the significant efforts in recent days to overcome the crisis, such as savings programs in Italy and Ireland.”
S&P also threw into relief the difficulty that euro zone countries face in trying not to strangle growth with so much austerity, saying there was a 40 percent chance that the output of the euro zone as a whole would shrink next year.
