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20th Jul 2018

US agency issues eurozone ultimatum

  • Police cordon off the New York Stock Exchange after protesters 'occupied' parts of Wall Street in recent weeks (Photo: Dan Nguyen @ New York City)

US ratings agency Standard & Poor's (S&P) has warned it might lower the grade of all six triple-A eurozone countries if the upcoming EU summit does not deliver.

The Wall-Street-based firm said on Monday (5 December) that a bad summit would hit the ratings of 15 eurozone economies, excluding Cyprus and Greece which already have rock-bottom levels. Five of the top-rated countries - Austria, Finland, Germany, Luxembourg and the Netherlands - might be cut by one notch, while France might go down by two.

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It lambasted the EU's handling of the crisis so far as "slow and reluctant ... defensive and piecemeal."

It noted the summit must deliver "a greater pooling of fiscal resources and obligations as well as enhanced mutual budgetary oversight" in order to give the European Central Bank the confidence to buy more weak bonds.

It added that leaders must put forward growth ideas to stave off recession. "A reform process based on a pillar of fiscal austerity alone risks becoming self-defeating ... eroding the revenue side of national budgets," it said.

The S&P bombshell came shortly after France and Germany agreed to change the EU Treaty to enforce fiscal discipline.

Berlin and Paris reacted to S&P with a communique saying they "reaffirm that the proposals they made jointly today will reinforce the governance of the euro area in order to foster stability, competitiveness and growth."

The ratings warning caused Asian markets to fall after an earlier rally, amid fears that if triple-A countries go down, it would make it harder for the EU's bail-out fund, the EFSF, to borrow money, creating a negative spiral.

"The market is unstable and has been moving up and down like a seesaw. Investors buy stocks on good news after a plunge and are selling unless the news moves in the right direction," Naoteru Teraoka from the Tokyo-based Chuo Mitsui Asset Management told Bloomberg. "It is time for Germany and France to act," Phillip Swagel, an economics professor at the University of Maryland, said.

Other analysts suggested S&P's shock statement is designed to boost its own reputation after a difficult few months, however.

In August it cut the United States' triple-A rating on the basis of an alleged $2 trillion miscalculation, triggering subpoenas on insider trading. In November, it announced it had cut France's rating, then said it made a mistake. It also 'upgraded' Brazil to a rating which the country already had and cut a type of Ukrainian bond which does not exist.

"It does seem as though they are being particularly aggressive in terms of their ratings changes," Kathy Jones from the US-based firm Charles Schwab told the Wall Street Journal.

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Germany had significant trouble offloading its bonds on Thursday in a sign that the eurozone crisis has spread to the very heart of Europe.

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