Bloomberg News

S&P Warns Over Euro-Area Bond ‘Weakest Link’ Effect

September 06, 2011

(S&P corrects story published Sept. 3 to say that severally-guaranteed bond would get rating of weakest country. See {EXT4 <GO>} for more on the sovereign debt crisis.)

Sept. 6 (Bloomberg) -- Standard & Poor’s Managing Director of European Sovereign Ratings Moritz Kraemer said the rating of a common euro-area bond would reflect that of the “weakest” country if severally guaranteed.

“If it is a several and not a joint guarantee, then it would be the weakest link approach,” Kraemer said at a conference in Alpbach, Austria, adding that “it depends on how the euro bond would be structured.”

While Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, and Italian Finance Minister Giulio Tremonti have endorsed euro bonds, German Chancellor Angela Merkel has ruled out common bond issuance under which high-deficit countries would be able to access financial markets at lower rates than they currently pay, easing the burden of financing their deficits.

“My understanding is that it’s a bond similar to the jumbo bonds in Germany,” where smaller federal states that don’t have enough issuance volume “gang together” and “everyone guarantees just his own bit,” he said.

“If the euro bond is structured like this, and we have public criteria on that, the answer is very simple,” he said. “If we have a euro bond where Germany guarantees 27 percent, France 20 percent and Greece 2 percent, then the rating of this euro bond would be CC, which is the rating of Greece.”

Support for Objections

Germany has support for its objections to euro bonds, with Austrian Finance Minister Maria Fekter saying on Aug. 23 that nations aren’t ready to issue such bonds. France, the second- biggest of the euro area’s six AAA-rated countries, see little room for a common euro bond without closer integration of Europe’s fiscal and budgetary regimes, said a French official who declined to be identified in line with government policy.

Banding with its weaker neighbors to sell debt would cost Germany 47 billion euros ($67 billion) a year in additional financing costs, according to the Munich-based Ifo economic institute.

Kraemer said S&P wasn’t in any talks with the European Union on a potential issue of euro bonds.

--Editors: Colin Keatinge, Angela Cullen

To contact the reporter on this story: Zoe Schneeweiss in Alpbach, Austria at

To contact the editors responsible for this story: Angela Cullen at

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