December 8, 2023

Debt Crisis Lurches Toward Heart of Euro Zone as Rifts Grow

A major credit agency warned of a cut in the top-grade rating of France, which was one factor in a slide of more than 3 percent in many of Europe’s major indexes.

Moody’s Investors Service said that rising borrowing costs and a deteriorating economic outlook were putting pressure on France’s creditworthiness. Moody’s has maintained France’s AAA rating so far, as have the other major ratings agencies, but it warned in October that it could put the rating on review.

“This crisis is hitting the core of the euro zone,” Olli Rehn, the European commissioner for economic and monetary affairs, said Monday. “We should have no illusions about this.”

A loss of France’s AAA rating would have implications beyond Paris. It would signal that the crisis had spread to core euro zone members and that its effects could no longer be contained to peripheral nations like Greece, Portugal and Ireland.

Spain and Italy have also had their borrowing costs rise significantly. The yields on Spanish 10-year bonds rose 0.20 percentage point, to 6.513 percent, on Monday, while the yield on Italian 10-year bonds rose 0.16 percentage point to 6.64 percent. In Germany, by contrast, yields on 10-year bonds were at 1.913 percent.

In addition, efforts to bulk up the euro zone’s bailout fund, the European Financial Stability Facility, to around $1.35 trillion would be dealt a huge blow were France to lose its top-notch credit rating.

Since the French government is providing a large guarantee to the fund — 158 billion euros — a reduction of its credit rating could sway euro zone leaders to abandon the idea of pumping up the fund to buy troubled countries’ bonds, and switch to a more radical set of proposals.

In the meantime, European policy makers are trying to push ahead with the deal they struck at a summit meeting late last month, which calls for the fund to take on debt to buy bonds and a 50 percent write-down of Greece’s debt.

But even the Greek part of the deal is far from done. Though Greece needs 8 billion euros in international aid next month to avoid bankruptcy, Lucas D. Papademos, the new Greek prime minister, said after talks Monday in Brussels that he was still seeking a written guarantee of support for additional austerity measures from Greece’s leading politicians.

Euro zone members have demanded those pledges in exchange for signing off on any new funds. Antonis Samaras, who leads Greece’s center-right party, New Democracy, has rejected the demand, characterizing it as a humiliation.

Mr. Papademos said the undertaking demanded by the euro zone was “necessary to eliminate uncertainties and ambiguities concerning actions to be taken in the future by parties that may be in power.” Turning to Greece’s hopes of restoring its finances, he said that “the task ahead of us is a Herculean one.”

With Germany resisting calls for the European Central Bank to be given a direct role in protecting Spain and Italy by buying both countries’ bonds, pressure has returned to allow the central bank to help finance the rescue fund, allowing the fund to intervene in the bond market.

Drafts of a European Commission feasibility study due this week on euro bonds, securities that would be backed by all 17 members of the European Union that use the euro, made clear that for the bonds to be effective, the European Union’s founding treaty would have to be changed — a lengthy process that can be vetoed by any member nation.

The draft paper also stressed that the project would “require an immediate and decisive advance in the process of economic, financial and political integration within the euro area.”

“Increased surveillance and intrusiveness in the design and implementation of national fiscal policies would be warranted,” it added.

The paper outlined three possible approaches, including the most radical proposal in which countries would jointly offer “several” guarantees covering all euro zone debt.

But only the most limited option — one that would provide the least advantages — “would seem feasible without major treaty changes and therefore relatively little delay in implementation,” the document said.

Under this approach, the bonds that would be only partly used by individual nations would be underpinned by pro-rata guarantees of euro zone member states, the document added.

“This approach to the stability bond would deliver fewer of the benefits of common issuance but would also require fewer preconditions to be met,” the document said.

The government in Berlin signaled its opposition, however. “The chancellor and the German government do not share the belief of many that euro bonds would be a kind of cure-all for the crisis now,” said Steffen Seibert, the spokesman for Chancellor Angela Merkel, according to Reuters.

Euro bonds would not be expected to provide a short-term fix to the problem, José Manuel Barroso, president of the European Commission, said in Brussels.

“We believe that when there is the appropriate level of integration and discipline it makes sense to have some kind of stability bonds in Europe,” he said.

Stephen Castle reported from Brussels and David Jolly from Paris.

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