AMID A WAVE of criticism, Standard & Poor’s has defended its decision to downgrade nine European countries and insisted that the region’s leaders aren’t doing enough to solve their debt crises.
The prime minister of France, the biggest economy hit by the downgrade, vowed to press ahead with cost-cutting measures that opponents say will suffocate growth. The loss of its coveted AAA status wounded France’s self-image and market credibility just as it’s facing a new recession and presidential elections.
The move on Friday night may make it more expensive for struggling countries to borrow money, reduce debts and sustain growth. It also came just as crucial negotiations between the Greek government and its private creditors appeared close to collapse.
Voices rose up yesterday against the power that ratings agencies wield. The criticism came from countries targeted by the downgrade such as Austria and Cyprus as well as from Germany, which was spared the blow.
‘Long road’ to winning back investor confidence
The downgrade brought a downbeat end to a mildly encouraging week for Europe’s most debt-laden nations. It also served as a reminder that the 17-country eurozone faces what German Chancellor Angela Merkel called a “long road” ahead to win back investors’ confidence.
Cyprus President Dimitris Christofias called the downgrade “unacceptable.”
“The latest downgrade is completely unfair and loaded with ulterior motives,” he told reporters. “Just when the Cyprus economy is breathing easier and showing signs of emerging from the crisis, and when our financing needs for 2012 and perhaps beyond 2012, have been covered, a (credit ratings) agency comes along to downgrade.”
Austria’s chancellor criticised S&P’s decision to strip his country of its AAA rating, and noted that his coalition government is working on an austerity package.
Werner Faymann wrote on his Facebook page that the decision showed “that Austria must become more independent from the financial markets.”
In Germany, a senior lawmaker with Merkel’s conservative party, Michael Meister, suggested action to reduce the significance of ratings, and Merkel signaled her support.
The foreign minister called for independent European ratings agencies instead of relying solely on the leading, US-based agencies such as Standard & Poor’s.
And Vice Chancellor Philipp Roesler, who is also the economy minister, was quoted as telling the weekly Der Spiegel, “It is apparent time and again that US rating agencies pursue very much their own goals.”
It’s unclear though whether a European agency would come to different conclusions or reduce what critics see as a disproportionate influence that ratings agencies have on markets and policymakers.
S&P defend decision
S&P spokesman Martin Winn dismissed suggestions that the agency’s decisions were political and could further hurt indebted countries. “The track record of our sovereign ratings as indicators of default risk worldwide is very strong,” he told The Associated Press.
S&P analyst Moritz Kraemer said in a conference call Saturday that European government measures aren’t sufficient to restore confidence.
“They have not achieved a solution that is sufficient in size or scope,” he said. He added that austerity measures require “huge sacrifices” of the public that might prompt a backlash.
Merkel and French Prime Minister Francois Fillon said the downgrades should push European countries to quickly implement a planned pact to strengthen budget discipline.
Germany and France have piloted rescue efforts for other eurozone countries as the continent has been swept up in crisis after crisis over the past two years. The downgrade, by pushing up France’s borrowing costs, could make it harder for France to help others.
Merkel sought to allay concerns that the downgrade of France would complicate the work of the bloc’s temporary rescue fund, the €440 billionEuropean Financial Stability Facility. However, she underlined the urgency of putting its permanent successor, the European Stability Mechanism, in place quickly.
Fillon said France’s government wouldn’t adjust this year’s budget yet, because it had been devised with an assumption of higher borrowing costs. S&P had warned 15 European nations in December that they were at risk for a downgrade, and Moody’s has France and other European governments on review.
Move ‘should not be dramatised or underestimated’
The downgrade, three months before France holds presidential elections, was “an alert that should not be dramatised any more than it should be underestimated,” Fillon said.
Standard & Poor’s stripped France of its coveted AAA status, knocking it down one notch to AA+, the level of US long-term debt after S&P downgraded it last summer. It dropped Italy even lower. Germany retained its top-notch rating, but Portugal’s debt was consigned to junk.
Stocks fell Friday as downgrade rumors reached the trading floors of Europe and the United States. But the declines were nothing like the wrenching swings of last summer and fall.