S&P threat adds to pressure on EU leaders

THE pressure on EU leaders to come up with a solution to the euro crisis increased yesterday with Standard and Poor’s threatening to downgrade the eurozone’s rescue fund and all six triple-A countries.

The US treasury secretary Tim Geithner continues his whistle-stop tour of major eurozone capitals today ahead of tomorrow’s two-day summit, having met European Central Bank president Mario Draghi and German finance minister Wolfgang Schaeuble.

As demand grows for some sort of debt pool to be created, European Council President Herman Van Rompuy will propose giving the EU’s bailout fund a banking licence to allow it to access ECB funding so it can buy up sovereign debt.

EU treaties forbid the ECB directly buying eurozone member states’ debt and Germany wants to maintain this situation. Berlin instead supports an alternative work around with central banks from member states giving money to the IMF, which in turn could lend to eurozone countries.

Reuters report that Mr Van Rompuy’s report to the summit will say the changes Germany requires to ensure enforceable fiscal discipline could be made with only minor changes to the EU treaty.

The issuance of jointeurozone bonds should be a long-term objective, he says, echoing recent German remarks making clear they could not be considered in the short term.

Mr Van Rompuy in his invitation letter to EU leaders ahead of the summit said he has invited the President of the ECB, Mr Draghi, to join them for the discussion on “moves towards a stronger economic union”.

Mr Draghi is also under pressure from the US as well as from many eurozone members to step up the ECB’s action but he has made it quite clear that it is up to the political leaders to at least take the first steps.

The S&P review of all the eurozone countries, except Greece and Cyprus, is clearly linked to the outcome of the summit with the agency saying it would conclude its work “as soon as possible” after the summit.

The agency’s senior director of sovereign ratings in London, Frank Gil, explaining the decision to put 15 of the 17 eurozone states on negative watch, said it was about time, pointing out that treaty change was a long process.

Without the right kind of action “we are looking at an outright recession in Europe next year”, he said.

But for peripheral countries with high debt and deficit and for strong exporters that have been rebalancing and deleveraging, the cost has been extremely high in terms of low growth and unemployment. Here, Mr Gil said, S&P were looking for a growth strategy and mutualisation of risk. He added that word that France and Germany were shifting towards some kind of fiscal transfer was potentially promising.