Standard and Poor’s has warned Germany and the five other triple-A members of the euro zone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc.
The US ratings agency is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “credit-watch negative”, meaning there is a one-in-two chance of a downgrade within 90 days.
It warned all six governments that their ratings could be lowered to AA+ if the credit-watch review failed to convince its experts. Markets have been braced for a potential downgrade of France but few expected Germany’s top rating to be called into question.
With regard to Germany, S&P said it was worried about “the potential impact ... of what we view as deepening political, financial, and monetary problems with the European economic and monetary union.”
The agency is moving as euro zone governments make further progress towards a comprehensive deal to contain the region’s sovereign debate crisis ahead of a crucial EU summit on December 9. Berlin and Paris want the euro zone to sign up to tougher fiscal rules to calm investors’ worries.
S&P told the six governments it would conclude its review “as soon as possible” after the summit. It told governments: “It is our opinion that the lack of progress the European policy makers have so far made in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the euro zone and European Union.”
S&P’s move, coming at such a sensitive stage in negotiations, is likely to spark further recriminations after repeated political criticism about how ratings agencies have behaved during the crisis. They stand accused by many politicians of deepening the crisis and are facing stringent new regulation.
But rating agencies are worried about who will pick up the bill for any euro-zone solution with many plans likely to increase the strain on the triple-A countries.
Governments worry a downgrade would make it harder for the euro-zone bailout fund, the European Financial Stability Facility, to raise financing in the markets for its rescue packages of Ireland, Portugal and Greece as it is underpinned by guarantees from the six nations rated triple-A. Those countries also fret that it could raise their own financing costs.
Any downgrading would further diminish the number of top-rated countries after S&P cut the US earlier this summer, although it saw its borrowing costs fall on the move as investors are desperate for top-rated paper.
S&P said in a draft statement it would look at both the political and monetary scores of a country. On the former, it said: “The overall consistency, predictability, and effectiveness of policy co-ordination among institutions within the eurozone has weakened at a time of severe ongoing fiscal and economic challenges to a degree more than envisioned.”
On the monetary score, it said it would look at the European Central Bank’s policy. “If we were to conclude that the ECB’s policy stance is unlikely to be effective in mitigating the economic and financial shocks that we believe Germany could be experiencing, we could lower this [monetary] score” within the entire rating, it said.