S&P: Credit ratings threat if recession hits eurozone

STANDARD & Poor’s warned that credit ratings in the eurozone could come under renewed pressure, if large parts of the currency bloc slip back into recession, as expected, next year.

David Beers, the global head of sovereign ratings at S&P, also said he expected the European Central Bank (ECB) and eurozone governments to come to some sort of accommodation on how to resolve the spiralling sovereign debt crisis.

“With so much at stake, one would expect that some accommodation can be found between eurozone monetary authorities and national policy makers that balances substantive government policy actions with more aggressive steps by the ECB to counter a renewed economic downturn,” Mr Beers said.

“Such steps would entail closer policy coordination and a redoubled political commitment at the euro group and EU levels.”

The ECB is under growing pressure from world leaders to do more to address a debt crisis that has reached the core of the eurozone. German opposition is preventing the ECB from being potentially tapped as a lender of last resort. But Mr Beers said Germany’s perceptions of how to deal with the crisis may change after a rise in its own borrowing costs. “It’s quite telling that there has been upward pressure on yields in Germany — it might begin to change perceptions in Germany.”

The German central bank was forced to buy large amounts of bonds at an auction yesterday, in one of its worst bond sales since the euro’s launch.

Mr Beers warned that recession in large parts of the eurozone may be difficult to avoid next year if yields on sovereign bonds remain elevated and bank balance sheets continue to contract.

The eurozone’s private sector contracted for a third month in November and purchasing manager surveys on Wednesday pointed to the eurozone economy shrinking 0.5% to 0.6% in the fourth quarter after 0.2% growth in the third quarter.

Mr Beers said: “The financial dynamics unleashed by the ongoing confidence crisis, in S&P’s view, have heightened the risk of renewed recession in a growing number of eurozone members that potentially could put additional downward pressure on [the] euro area’s sovereign ratings.”

“This risk, I regret to say, looks unlikely to diminish quickly,”