STANDARD & POOR’S has justified its threat to the sovereign ratings of nearly all euro zone countries by saying it was concerned about strains on the banking system, political bickering over the debt crisis and the heightened risk of recession.
The agency’s manoeuvre, only days before a crucial European summit in Brussels, greatly increases pressure on political leaders as they strike for a difficult deal to settle months of escalating turmoil in the euro zone.
Amid fear that the crisis could lead to a collapse of the single currency, S&P said last night that the it will bring its scrutiny of the 15 ratings to a conclusion after the end of the summit which begins on Thursday night and continues on Friday.
In an explanatory note circulated last night, the agency said the summit provides an opportunity to break the pattern of “defensive and piecemeal measures” to date and to overcome individual national interests and preferences.
“We believe that the risks of a deepening and broadening of the crisis have risen markedly and the repercussions of this development will in our view be felt across the monetary union, considering the interconnectedness of the economic and monetary union economies and financial markets,” it said.
“If the response of policymakers is not viewed by investors as robust, we believe market confidence could take another, possibly steep, drop downwards, meaning higher refinancing costs for banks and governments, further deceleration of credit and demand, and an even greater required fiscal consolidation effort to arrest deteriorating credit dynamics.”
The agency said its actions signalled its view of the risks to euro zone sovereign creditworthiness if the summit did not generate an “effective and credible” response.
“We believe that the failure to present a strategy that would in scope and content address investors’ concerns could weigh more heavily on financing conditions than what we observed in the aftermath of previous summits and significantly exacerbate recession risks.”
In a note on Ireland, S&P said the warning of a potential downgrade was prompted by its concerns about the potential impact on the State of what it views as deepening political, financial, and monetary problems within the euro zone generally.
“To the extent that these issues depress export demand from Ireland’s EU trading partners, and further constrain credit in a private sector already delevering following the banking crisis, its economic growth outlook – and therefore the prospects for a sustained reduction of its public debt ratio – could be affected.
“Further, it is our opinion that the lack of progress the European policymakers have made so far in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the euro zone and EU.
“This, in turn, informs our view about the ability of European policymakers to take the proactive and resolute measures needed in times of financial stress. We are therefore reassessing the euro zone’s record of debt-crisis management and its implications for our view on the effectiveness of policymaking in Ireland.”
The threatened downgrades came against the backdrop of positive economic data for Ireland which showed services activity here had risen for the 11th month in a row in November.
