Tags: S&P | euro | merkel | sarkozy | crisis

S&P: Europe Must Agree to Strengthen Fiscal Union

Tuesday, 06 Dec 2011 07:50 PM

 

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Standard & Poor’s is looking for euro-area policy makers to move the region closer to a “fiscal compact” that would enable the European Central Bank to help support euro-area nations, according to S&P’s John Chambers.

European Union leaders plan to meet Thursday and Friday in Brussels to end a crisis that led to bailouts of Greece, Ireland and Portugal, and now threatens to engulf Italy. German Chancellor Angela Merkel and French President Nicolas Sarkozy presented a plan Monday to rewrite the EU’s governing treaty to allow tighter economic cooperation.

“It’s key will be to get toward closer fiscal union, fiscal compact,” Chambers, managing director of sovereign ratings at S&P in New York, said of the European summit on Bloomberg Television’s “Street Smart” with Adam Johnson and Lisa Murphy. “That in turn would enable the ECB to be more active in its securities market purchases.”

S&P put Germany, France and 13 other euro-area nations on review for a downgrade Monday, saying “continuing disagreements among European policy makers on how to tackle” the region’s debt crisis risks damaging their financial stability. The move came four months after S&P cut the U.S. from the top rating of AAA to AA+, saying “extremely difficult” political discussions over how to reduce America’s more than $1 trillion budget deficit tainted the credit quality of the world’s largest economy.

To avoid downgrade, the credit-rating firm is looking for “further mutualization of not only obligations, but also resources at the EU level,” Chambers said.

‘Similar Concerns’

Treasuries have returned 3.4 percent since the U.S. was downgraded to AA+ by S&P on Aug. 5, according to Bank of America Merrill Lynch index data. The New York-based unit of McGraw-Hill Cos. said America was becoming “less stable, less effective and less predictable.”

“Some of you will feel reminded of the rating action that we took earlier this year on the U.S., which was driven by similar concerns about the ability of policy makers to design and implement policies in a timely manner that would mitigate the risks of a financial and liquidity crisis emerging,” Moritz Kraemer, S&P’s head of European sovereign ratings, said today in a conference call. “It has to be said that the challenge for the euro zone is of course much larger because of the multilateral nature of the coordination problem is the real challenge.”

Credit-default swaps tied to France fell 15 basis points on Dec. 5 to 180 basis points, while contracts insuring against a default on Germany’s debt declined about 5 basis points to 92 basis points, CMA data show. That compares with 51 basis points for credit swaps on the U.S. and 89 basis points for the U.K.

‘Political Strengths’

A basis point on a credit-swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Among the reasons that France is rated AAA, higher than the U.S., are its political strengths, Chambers said. French government bonds due in 10-years yield 1.15 percentage points more than similar-maturity Treasuries.

“One of the strengths that France has versus the United States are the political settings,” he said. “Obviously the U.S. has the dollar and can set its monetary policy according to conditions in its own economy.”

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