December 20, 2024

Celebration Succumbs to Concern for Euro Zone

In European trading and on Wall Street, shares fell sharply after Moody’s Investors Service and the Fitch Ratings warned that European efforts to protect the common currency had not resolved the immediate dangers of a significant economic downturn and troubles in the banking system.

By taking a “gradualist” approach to forging a true fiscal union among the 17 euro zone members, politicians were imposing additional economic and financial costs on the region, Fitch warned. “It means the crisis will continue at varying levels of intensity throughout 2012 and probably beyond, until the region is able to sustain broad economic recovery,” the agency said.

Moody’s said it was putting the sovereign ratings of European Union countries on review for a possible downgrade in the coming months. Standard Poor’s issued a similar warning last week, saying it could lower the sterling credit ratings of Germany and France and cut other countries’ credit scores as Europe headed into a probable recession next year.

On Monday, President Nicolas Sarkozy of France acknowledged that a loss of the nation’s triple-A rating could come soon, but said it would not pose an “insurmountable” difficulty. Mr. Sarkozy has made it a priority of his coming presidential campaign to keep the country’s top credit rating, and repeated a pledge to reduce the nation’s debt and deficit without cutting wages and pensions.

Mr. Sarkozy’s rival, the Socialist candidate François Hollande, said Monday that he would try to renegotiate the terms of the Europewide deal struck Friday if he were elected president in May, saying the pact would stifle growth.

With markets and rating agencies expressing mild disappointment with the deal, the spotlight returned to the European Central Bank, the only institution with overall responsibility for maintaining the health and integrity of the euro.

Amid last week’s political theater, the E.C.B. took a crucial step to help prevent the biggest European banks from succumbing to an increasingly volatile economic and market environment by agreeing to provide banks with unlimited funds for up to three years.

“That reduces the possibility of a Lehman moment quite substantially,” Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, said during a conference call on the crisis. “It says to every bank in the euro area that even if you’re shut out of the market, we are the lender of last resort and provide you with necessary funding.”

While that may ease the pressure on the financial system, any further downgrade in the credit rating of European governments could raise the fever of the crisis by making it more expensive for the weakest countries to service their debts. It could also make it more difficult for banks in Italy, Spain and even France to get credit from other banks, causing a potential pullback in lending to consumers and businesses at a time when economic growth is already being squeezed.

In the lightning-fast world of financial markets, the efforts by Mr. Sarkozy, Chancellor Angela Merkel of Germany and other euro zone leaders appear to be moving too slowly to satisfy the demands of investors.

While the summit meeting in Brussels on Thursday and Friday marked a major step toward greater fiscal union among the core countries, the architecture will take months, even years, to construct.

In the meantime, the decision to embrace significant new spending cuts and tax increases across much of Europe at a time of economic weakness is expected to undermine growth in the immediate future, analysts said.

Carl B. Weinberg, the chief economist at High Frequency Economics, said some European banks that were already selling assets to keep enough money on hand were also curbing lending.

“We are now moving off the charts in terms of normal procedures, and moving into a grim time for European banks,” Mr. Weinberg said. “This is not a good time to be thinking of European bank shares because a contraction of credit has already begun and will get worse.”

Indeed, despite the political will to bring the euro zone under more centralized management, ratings agencies, banks and businesses are increasingly considering the possibility that countries could default, or leave the currency union.

Many governments and investors are hoping the E.C.B. will ride to the rescue by buying the bonds of troubled governments in Italy and Spain, in a bid to keep their borrowing costs from rising to levels that forced Greece, Ireland and Portugal to take international bailouts.

But Germany has opposed that move as being outside the bank’s mandate, and the E.C.B. president, Mario Draghi, made clear last week that the bank remained loath to take such steps.

Article source: http://www.nytimes.com/2011/12/13/business/global/moodys-warns-of-possible-downgrade-to-some-euro-zone-economies.html?partner=rss&emc=rss

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