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Spain downgrade adds to pressure on Europe

Spain downgrade adds to pressure on Europe
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First Published: Thu, Oct 20 2011. 01 18 AM IST

Photo: Bloomberg
Photo: Bloomberg
Updated: Thu, Oct 20 2011. 01 18 AM IST
Brussels/Madrid: Adouble-notch downgrade of Spain’s credit rating has piled pressure on European leaders to make convincing progress on solving the region’s debt crisis at a 23 October summit.
The decision by Moody’s Investors Service came a day after the agency warned France its triple-A rating could come under pressure and as Greeks began their biggest strike in years in protest at a painful austerity drive designed to avert default.
Photo: Bloomberg
Markets are counting down to a summit of European Union (EU) leaders on Sunday, which Paris has said will deliver a decisive outcome, while Berlin has been more cautious. EU sources said there were still deep divisions among negotiators, with the prospect of a significant breakthrough far from certain.
The Spanish rating cut, which highlighted the threat of contagion from debt-stricken Greece, tempered a sharp rally in shares on Wall Street late on Tuesday.
German Chancellor Angela Merkel warned that leaders would not solve the debt crisis at a single meeting.
“These sovereign debts have been built up over decades and, therefore, one cannot resolve them with one summit, but it will take difficult, long-term work. Nonetheless, I do think we will also be able to take relevant, important decisions,” she said.
A French government spokeswoman said Merkel and French President Nicolas Sarkozy, the leaders of Europe’s two biggest economies, would talk later on Wednesday.
“It’s obvious that the contacts between Germany and France will be constant and permanent until 23 October,” said Valerie Pecresse, who is also France’s budget minister.
The hope is that Sunday’s summit will agree to new steps to reduce Greece’s debt, strengthen the capital of banks with exposure to troubled euro zone sovereigns and leverage the euro zone’s rescue fund to prevent contagion to bigger economies.
Scotching a media report that said a deal had been struck between Paris and Berlin to scale up the European financial stability facility (EFSF) by around five times to more than €2 trillion (Rs136 trillion), a senior EU official said: “It’s wrong.”
A second source said: “It’s naive to think you can make those calculations and come up with a nice round €2 trillion figure. It’s not nearly as simple as that.”
The summit is likely to agree to leverage the bailout fund by allowing it to underwrite a portion of newly issued euro zone debt, officials have told Reuters. But the details are still being thrashed out.
“I think the models to make the EFSF more flexible need... significantly more preparation,” Austrian finance minister Maria Fekter said.
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First Published: Thu, Oct 20 2011. 01 18 AM IST
More Topics: Spain | Europe | Moodys | Bonds | Debt |