Bloomberg News

Schaeuble Says S&P Move ‘Best Encouragement’ for EU Heads

December 06, 2011

(Updates with Geithner in Berlin in fifth paragraph. For more on the European debt crisis, see EXT4.)

Dec. 6 (Bloomberg) -- German Finance Minister Wolfgang Schaeuble said Standard & Poor’s downgrade warning for 15 euro- area governments will spur European leaders to ratchet up efforts to resolve the debt crisis at a Dec. 8-9 summit.

A day after German Chancellor Angela Merkel and French President Nicolas Sarkozy strengthened their joint push for new rules to tighten euro-area economic cooperation, Schaeuble said that S&P’s warning -- issued hours after Merkel and Sarkozy met in Paris -- was the “best encouragement” to drive toward a solution at the European Union summit in Brussels.

“The truth is that markets in the whole world right now don’t trust the euro area at all,” Schaeuble said today in Vienna. S&P’s statement will prompt European leaders “to do what we’ve promised, namely to take the necessary decisions step-by-step and to win back the confidence of global investors.”

Merkel and Sarkozy are leading the charge toward the latest crisis fix after agreeing a joint position on automatic penalties for deficit violators and anchoring debt limits into euro states’ constitutions. Investors are looking for such an agreement on closer fiscal cooperation in the euro area to trigger intensified action from the European Central Bank.

With EU leaders due to gather in a little over 48 hours, U.S. Treasury Secretary Timothy Geithner arrived in Berlin for talks with Schaeuble after traveling to Frankfurt earlier today to meet with ECB President Mario Draghi and Bundesbank President Jens Weidmann. The ECB holds a policy meeting on Dec. 8.

AAA Warning

The euro fell 0.2 percent against the U.S. dollar, trading at $1.3378 as of 2:46 p.m. Frankfurt time -- down from an intraday high of $1.3487 yesterday as the S&P’s warning doused optimism over joint action by euro leaders. S&P put Germany and France among the six AAA-rated European countries on watch for potential downgrades pending the outcome of the EU summit.

Among the summit measures announced by Merkel and Sarkozy were plans to fast-track the euro’s permanent rescue fund to 2012, one year earlier than envisaged. Germany and France will also seek to ensure that decisions by the fund, the European Stability Mechanism, can be made by a “qualified majority” rather than a unanimous vote by the participating governments. Sarkozy said they aimed to reach consensus on treaty change with other euro leaders by March.

Conviction Reinforced

Merkel and Sarkozy said in a joint statement that they “took note” of the move by S&P, and Europe’s two biggest economies “reinforce their conviction” that common proposals for closer fiscal union will lead the way out of the crisis.

Merkel sidestepped a further response to S&P’s action, saying leaders will press ahead undeterred and that credit assessment is S&P’s “responsibility.”

“We will take decisions on Thursday and Friday that are important and unavoidable for the euro zone,” Merkel said today after meeting with Afghan President Hamid Karzai in Berlin. “I have always said this is a longer process that will take quite a long time. We will keep moving forward on this path.”

Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of euro-area finance ministers, said the rating company’s warning was like a “knockout blow” to governments that are undertaking measures to scale back deficits.

“I have to wonder that this news reaches us out of the clear blue sky at the time of the European summit -- this can’t be a coincidence,” Juncker said in an interview with German radio broadcaster Deutschlandfunk.

‘Excessive’

The S&P move was “excessive,” said Vincent Truglia, managing director at New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody’s Investors Service, a rival rating company.

“Countries like Germany, Luxembourg, Netherlands, Finland are AAA, and Austria is a pretty strong AAA,” he said.

S&P said that ratings could be cut by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and by up to two notches for the other governments.

The other countries warned are Estonia, France, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain. S&P said it maintained the negative outlook for Cyprus, and Greece wasn’t put on “creditwatch.”

After Merkel last week compared the mission to stabilize the euro to a “marathon,” Sarkozy said yesterday that euro leaders would go on a “forced march” to win back confidence.

“We want to go as fast as possible based on this agreement between France and Germany, which is open to others,” Sarkozy said after meeting with Merkel over lunch at the Elysee palace in Paris.

‘Fiscal Compact’

Both leaders declined to comment on speculation that the ECB could step up bond purchases, following statements last week from President Draghi that “other elements might follow” from the central bank if European leaders agree on a “new fiscal compact.”

“It’s a step in the right direction for the ECB but we’ll want to know how the automatic sanctions are triggered,” said Klaus Baader, co-chief economist at Societe Generale SA. “When France and Germany have joint press conferences and say we agree on everything you have to take that with a pinch of salt.”

Merkel and Sarkozy yesterday repeated their rejection of jointly sold euro bonds in solving the crisis, while seeking to calm concerns of euro-area member states that the European Court of Justice would be able to veto national budgets as part of their proposal for centralized deficit supervision.

A member of the European Commission, Laszlo Andor of non- euro-member Hungary, scoffed at the Merkel-Sarkozy initiative.

“Automatic sanctions are a joke,” Andor, who is charge of employment and hasn’t played a frontline role in the crisis, said in a Twitter Inc. posting. “Fiscal union alone will not save the single currency -- debt union also necessary. Bring in eurobond and activate ECB!”

Asked whether Andor spoke for the Brussels-based commission, a spokeswoman, Karolina Kottova, pointed reporters to statements by its president, Jose Barroso. While the commission doesn’t have a vote on the proposed amendments, it will be represented by Barroso at the summit.

--With assistance from Zoe Schneeweiss and Jonathan Tirone in Vienna, Mark Deen and Helene Fouquet in Paris, Tony Czuczka and Alan Crawford in Berlin, Jeff Black in Frankfurt, Simon Kennedy in London and James G. Neuger and Jonathan Stearns in Brussels. Editors: Leon Mangasarian, Alan Crawford.

To contact the reporters on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net; Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net


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