“We are at a turning point, a decisive point that requires clear and determined responses, comprehensive responses,” José Manuel Barroso told reporters in Brussels. “We are at a very, very sensitive point in European construction.”
His position echoes what the German government has said in recent days in preparation for a meeting of European leaders in Brussels on Sunday.
“Even if we do arrive at a political decision on everything that is on the table, which I hope we will, that doesn’t necessarily mean that there will not then have to be an implementing phase,” Mr. Barroso said. “You cannot hope that this will be the end of all our troubles, but I very much hope that important, long term, positions, which are important for the future of the European Union and the euro, will come about.”
The comments came a day after Moody’s Investors Service raised the pressure on euro-zone leaders by downgrading Spain’s long-term sovereign rating by two notches and placed it on watch for further downgrades.
Moody’s cut Spain’s rating to A1 from Aa2, a lower investment-grade rating, citing concerns over debt levels in the Spanish banking and corporate sectors, as well as broader concerns about weakening growth among countries that share the euro.
The agency also warned that a further cut for Spain was possible if the euro debt crisis intensified. Italy and other ailing euro economies have also recently received credit rating downgrades, reflecting concerns both about their own prospects and the squabbling among European leaders over what would be a viable solution to the euro debt crisis.
Mr. Barroso’s comments also reflect the fact that negotiations over plans to increase the firepower of the euro bailout fund, and to increase the contribution of banks to the Greek bailout, remain very difficult, said one European official speaking on condition of anonymity. Another sensitive issue is how to raise the funds to recapitalize European banks.
Discussions on both issues are expected to continue in Frankfurt later Wednesday at a gathering to mark the departure of the president of the European Central Bank, Jean-Claude Trichet, which is likely to be attended by many key players.
With talks intensifying, rumors continued to swirl. Germany’s finance minister, Wolfgang Schäuble, told lawmakers in Berlin that the firepower of the euro zone bailout fund, the European Financial Stability Facility, might be increased to a maximum of €1 trillion, or $1.38 trillion through an insurance model, Financial Times Deutschland reported.
Asked about plans to strengthen the facility, Olli Rehn, the European commissioner for economic and monetary affairs, said in Brussels that there was no agreement yet and that this was “very much a work in progress.”
Mr. Barroso declined to comment on the decision by Moody’s to downgrade Spain but said that the country might gain new protection if the bailout fund were expanded. Under an agreement struck in July, the fund will gain the power to extend aid to nations that do not require a full bailout; currently Greece, Ireland and Portugal have received international rescue packages.
Increasing the power of the European stability fund “is precisely so that, if necessary, we can respond to situations in countries that are not currently covered by programs,” Mr. Barroso said.
Moody’s decision to downgrade Spain followed similar ones by Standard Poor’s and Fitch Ratings. Last Thursday, S.P. lowered Spain’s long-term debt rating by one notch, to AA minus from AA, because of the country’s poor growth prospects and troubled banks.
“Spain’s large sovereign borrowing needs as well as the high external indebtedness of the Spanish banking and corporate sectors render it vulnerable to further funding stress,” Moody’s wrote in a note.
The government in Madrid has pledged to lower its public deficit to 6 percent of gross domestic product this year from 9.3 percent of G.D.P. in 2010. It has stuck to a growth forecast of 1.3 percent this year — a figure that also underpinned its 2011 budget deficit plan — even though most economists now expect Spain to post growth of about 0.7 percent this year.
Elena Salgado, the finance minister, also recently dismissed a forecast by Goldman Sachs that Spain would fall back into recession at the start of 2012.
Moody’s, meanwhile, said that it expected growth next year of “1 percent at best,” compared with earlier expectations of 1.8 percent.
“Lower economic growth in turn will make the achievement of the ambitious fiscal targets even more challenging for Spain,” Moody’s wrote. The agency added that it also had “serious concerns regarding the funding situation of the regional governments and their ability to reduce their budget deficits according to targets.”
The downgrades by major rating agencies also come ahead of a Spanish general election on Nov. 20 that is expected to return the center-right Popular Party to power with a parliamentary majority, according to opinion polls.
Moody’s said that it expected Spain’s next government to be “strongly committed to continued fiscal consolidation,” warning that “Spain’s rating would face further downward pressure if this expectation did not materialize.”
Raphael Minder reported from Madrid.
Article source: http://feeds.nytimes.com/click.phdo?i=411bfc1ef1478c3006e112e875d69923
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