Archive for Tuesday, December 6, 2011

EU seeks to save euro, but S&P isn’t convinced

December 6, 2011

Advertisement

— Seeking to restore confidence in the euro, the leaders of France and Germany jointly have called for changes to the European Union treaty so that countries using the euro would face automatic penalties if budget deficits ran too high.

But not everyone on Wall Street was reassured that Europe would get control of its 2-year-old debt crisis.

Stock prices rose and borrowing costs for European governments dropped sharply in response to the changes proposed on Monday by French President Nikolas Sarkozy and German Chancellor Angela Merkel. But some of the optimism faded late in the day when Standard and Poor’s threatened to cut its credit ratings on 15 eurozone countries, including the likes of Germany, France and Austria, which have been considered Europe’s safest government debt issuers.

The announcement came only hours after Sarkozy and Merkel revealed sweeping plans to change the EU treaty in an effort to keep tighter checks on overspending nations. The proposal is set to form the basis of discussions at a summit of EU leaders on Thursday and Friday that is expected to provide a blueprint for an exit from the crisis.

While the Franco-German plan would tie the 17-eurozone nations closer together, a tighter union would likely also result in heavier financial burdens for the region’s stronger economies, which have already put up billions of euros to rescue Greece, Ireland and Portugal.

Analysts noted that the proposals did not foresee a clear roadmap on how to get the eurozone economies growing again and to reduce funding costs for struggling nations in the long term.

Many analysts have called on the European Central Bank to intervene in debt markets to lower struggling countries’ borrowing costs or the creation of eurobonds — debt backed by all 17 euro countries.

The euro fell after the S&P; announcement, trading down 0.1 percent at $1.339, and trading in futures on the S&P; 500 and Dow Jones Industrial Average turned negative.

After the New York markets closed, S&P; confirmed that it had placed 15 nations on notice for possible downgrades. Only two countries that use the euro weren’t affected: Cyprus already had that designation, and Greece already has ratings low enough to suggest that it’s likely to default soon anyway.

Comments

Use the comment form below to begin a discussion about this content.

Commenting has been disabled for this item.