S&P warns eurozone of sweeping downgrade

WASHINGTON — Standard and Poor’s on Monday warned Germany, France and 13 other eurozone members of possible credit downgrades as economic conditions worsen and the region’s leadership remains divided over what to do.

Raising the stakes three days before Europe’s leaders were to meet to forge a comprehensive fix to the economic crisis, S&P placed the 15 countries on a negative credit watch — a warning of a possible imminent cut in their sovereign credit ratings.

“Systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole,” the ratings agency said in a statement.

It cited tightening credit across the single-currency zone, the rising costs for even the fiscally strongest governments to borrow, and deteriorating economic conditions that could push the whole region into recession next year.

But S&P also blamed “continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members.”

The warning threatened a one-notch cut to the hallowed AAA ratings of Germany, the Netherlands, Finland, Luxembourg and Austria.

France, also AAA-rated and the eurozone’s second-largest economy, could be hit with a two-notch cut, as could the other countries currently rated below AAA.

Cyprus and Greece, their ratings already cut to just above or at junk bond level, were not affected by the warning.

S&P said it would complete a review of the 15 countries’ ratings “as soon as possible” following the EU summit in Brussels Thursday and Friday.

It called the summit “an opportunity for policymakers to break the pattern of what we consider to have been defensive and piecemeal measures to date, overcome individual national interests and preferences, and advance a credible response to the crisis that would go far towards restoring investor confidence.”

“If the response of policymakers is not viewed by investors as robust, we believe market confidence could take another, possibly steep, drop downwards,” that could force a downgrade of the 15.

“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,” it said.

That would significantly raise the risk of recession, the ratings firm added.

Leading a push to implement new eurozone-wide rules on fiscal discipline, Paris and Berlin pledged Monday to do all they could to preserve eurozone stability.

“France and Germany, in full solidarity, confirm their determination to take all the necessary measures, in liaison with their partners and the European institutions to ensure the stability of the euro area,” they said in a joint statement after the S&P warning was issued.

“France and Germany reaffirm that the proposals they made jointly today will reinforce the governance of the euro area in order to foster stability, competitiveness and growth,” said the statement.

Earlier Monday German Chancellor Angela Merkel and French President Nicolas Sarkozy demanded a new EU treaty with tougher budgetary rules for all members to deal with the eurozone debt crisis.

Merkel and Sarkozy backed automatic sanctions against EU member states whose deficits exceed three percent of gross domestic product.

The S&P statement was issued after US markets were closed, but earlier news of it, first reported in the Financial Times, sent the euro falling while US stocks dropped sharply off their highs.

After rising to $1.3487 on the Merkel-Sarkozy statement, the FT story sent the euro sinking back down to $1.3394 by 2215 GMT, slightly off its $1.3403 level of late Friday.