S&P warns triple-A ratings may be lost

STANDARD & Poor’s (S&P) is to warn that Germany and France may be stripped of their triple-A credit ratings as the debt crisis prompts all 17 euro nations to be put on review for a possible downgrade, said two officials familiar with the S&P decision.

The eurozone’s six triple-A rated countries are among the nations to be placed on a negative outlook, and their credit ratings may be cut depending on the result of a summit of EU leaders on Friday, the officials said yesterday. The euro reversed its gains and US Treasuries rose after the Financial Times reported the credit-ranking firm planned to reduce six triple-A outlooks, without citing a source.

John Piecuch, a spokesman for S&P in New York, gave no comment.

The downgrade warnings come as German Chancellor Angela Merkel and French President Nicolas Sarkozy push to rewrite the EU’s governing rules to tighten economic co-operation in a demonstration of unity on ending the debt crisis. With the fate of the currency at risk, Merkel and Sarkozy presented a common platform for the summit.

Downgrades of Germany and France would affect the rating of the European Financial Stability Facility (EFSF) which has funded rescue packages for Greece, Ireland and Portugal partially through bond sales.

If the EFSF has to pay higher interest on its bonds, it may not be able to provide as much funding for indebted nations.

France and Germany will propose a limited change to the EU Treaties at the summit and want to fast-track the new bailout fund, to which Ireland would contribute about €11 billion.

They say the change to the Treaty could be made by the middle of next year. It is not clear whether Ireland would need to hold a referendum on it and whether it would involve all 27 EU members or just the 17 eurozone countries.

Underlining the seriousness of the situation, US Treasury Secretary Tim Geithner flies into Frankfurt today for discussions with European Central Bank (ECB) president Mario Draghi before going to Paris and Berlin and onto Marseilles for a conference attended by EU leaders, including the Taoiseach.

Sarkozy said that, without Franco-German agreement, there was a danger of the euro imploding. Their agreement was essential to prevent a “co-ordinated effort to stop contagion” while Merkel said: “We have begun to create a fiscal union.”

However, the pooling of debt and revenues that economists say is necessary for a fiscal union was absent from their deal, with both ruling out eurobonds.

All eyes will be on Draghi on Thursday when he holds his monthly ECB policy meeting. He is expected to reduce interest rates for the second month in a row, but it is doubtful if he will give any indication of greater ECB involvement in the crisis.

He has put pressure on EU politicians to come up with a sufficiently comprehensive plan to calm markets. The markets’ initial reaction was positive to Merkel and Sarkozy’s announcement yesterday.

Merkel has reduced the scope of her demand that countries who breach debt and deficit rules could be tried and fined by the European Court of Justice.

The court’s action would be confined to judging if fiscal rules are being properly implemented and it could not override national parliaments on their budgets.

The European Stability Mechanism, which was due to replace the current bailout facility, the EFSF, in July 2013, should come into force a year earlier, they announced.

It is to be worth €500 billion, with €80bn paid in and the balance callable from the eurozone member states.