DOWNGRADE THREAT:ECB PRESIDENT Mario Draghi is facing increasing pressure to announce fresh measures to stabilise the euro zone tomorrow after a downgrade warning on the zone's bailout fund and a flying visit yesterday by US treasury secretary Timothy Geithner.
Mr Geithner, in Europe for the fourth time in as many months, said that the US has no plans to top up the finances of the International Monetary Fund (IMF), one option under discussion.
After talks in Frankfurt with Mr Draghi and Bundesbank president Jens Weidmann, Mr Geithner dismissed as “not accurate” claims that the US Federal Reserve could add firepower to an IMF-headed fund to tackle the crisis.
“I’m in Europe to emphasise how important it is for the United States and the global economy as a whole” for Europe to succeed, he said in Berlin. Ahead of tomorrow’s summit in Brussels, Mr Geithner flies to Rome and Paris. His warning is clear: another EU summit fudge this week could endanger the US economy. Concerns grew yesterday when US ratings agency Standard & Poor’s announced a possible downgrade of the €440 billion euro-zone bailout fund (EFSF).
A downgrade would, the agency said, be inevitable if any 15 euro-zone countries it put on a watchlist on Monday, including several EFSF guarantors, had their ratings cut by one or two notches.
Blaming “continuing disagreements” on a crisis strategy among EU leaders, the agency said it would wait until after this week’s euro-zone summit to announce its final rating decision.
Reactions around Europe ranged from outrage to optimism. In the latter camp was German finance minister Wolfgang Schäuble, who suggested the ratings agency’s announcements would “encourage” political leaders to reach agreement at this week’s EU summit.
“The truth is that markets in the whole world right now don’t trust the euro area at all,” said Mr Schäuble, saying the ratings issue had forced leaders “to do what we’ve promised, namely to take the necessary decisions step by step and to win back the confidence of global investors.”
Standard & Poor’s defended their downgrade warnings yesterday, citing rising risk premiums on euro-zone bonds and refinancing difficulties of eurozone banks.
“In our opinion there is proof that the crisis is no longer one of individual periphery countries but has eaten its way into the heart of the euro zone,” said Moritz Krämer, Standard & Poor’s chief Europe analyst, on German television. “We see this week’s crisis meeting as a considerable chance to turn around that process. This is a crisis of trust that can only be tackled with robust measures.”
In a joint statement, France and Germany said they wanted to show “determined solidarity with European partners” to restore calm in the single currency.
German chancellor Angela Merkel declined to be drawn on the implications of the downgrade threat, saying “what a rating agency does is the responsibly of the ratings agency”.
“On Thursday and Friday we will take decisions we think are important and imperative for the euro zone,” she said. “With that we will make a contribution to stabilising the euro zone and win back, I think, and win trust.”
Others were less diplomatic. French national bank head Christian Noyer said he was “appalled” by the announcement, adding: “The ratings agencies were one of the motors of the 2008 crisis. Are they also the motor of the current crisis?” Eurogroup leader Jean-Claude Juncker told German radio the announcement was a “knock-out blow” to euro-zone leaders.
“I have to wonder that this news reaches us out of the clear blue sky at the time of the European summit – this can’t be a coincidence,” said Mr Juncker.
Dr Ulrich Kater, chief economist with Deka bank, agreed that the timing of the announcement was no coincidence.
“You can see this as a challenge to politicians to take long-term measures to reduce the debt burden,” he said.
DZ bank economist Stefan Bielmeier said all players were now fully aware of what is at stake from tomorrow in Brussels.
“The EU doesn’t have many options left,” he said.
The European Commission declined to comment directly on the downgrade warning, and the spokesman for economics commissioner Olli Rehn would not say whether the EU’s executive branch saw anything cynical in the manoeuvre.
