Standard & Poor's warned today that it could downgrade the triple-A rating of the euro zone debt rescue fund, a day after nearly all governments of the monetary union were given a similar notice.
The ratings agency placed the European Financial Stability Facility (EFSF) on "negative" watch after doing the same for 15 euro zone members, including the six nations with top credit scores.
"Depending on the outcome of our review of the ratings on EFSF member governments, we could lower the long-term rating on the EFSF by one or two notches, if any," said S&P in a statement.
A "CreditWatch negative" placement means there is at least a one-in-two probability that the rating will be lowered in the short term, the agency said.
The €440 billion EFSF was created in May last year to protect vulnerable euro zone nations after Greece was bailed out by the European Union and the IMF. It has since been used to provide rescue loans to Ireland and Portugal. With a triple-A rating, the EFSF is able to raise funds in the bond market with much lower interest rates than bailed out nations would get on their own.
Euro zone leaders hit back at S&P threat
Euro zone nations hit back today at the threat by ratings agency Standard & Poor's to downgrade 15 euro zone countries, and promised to push ahead with reforms to tighten budget discipline.
Many EU officials criticised the timing of S&P's warning, coming hours after France and Germany announced a joint plan to pull the euro back from the brink with a new EU treaty and tougher budgetary rules.
The warning came three days before and EU summit on Thursday and Friday, which S&P said was now of critical importance.
European Central Bank governing council member Ewald Nowotny claimed the S&P warning was politically motivated.
"I think that the timing and the scale of this warning has a clear political context, with a rating agency getting into politics. This is not unproblematic," the Austrian central bank chief told reporters in Vienna.
Nowotny said the agency's statement was aimed not at a particular country, but at the whole euro zone. "That means it is a political statement that needs to be seen in the context of the coming summit," he added.
French Foreign Minister Alain Juppe said that the strategy aimed at ending the euro zone debt crisis announced by President Nicolas Sarkozy and German Chancellor Angela Merkel after crisis talks in Paris was "the response" to S&P.
The plan to toughen EU budgetary rules "is precisely the response to one of the major questions of this ratings agency that mentions the insufficiency of European economic governance," Juppe said.
"We have a trajectory for revising our public deficits that we will stick to," Juppe said, voicing confidence that the Franco-German plan would provide impetus to Thursday and Friday's crucial summit of EU leaders in Brussels.
Juppe said that he was surprised by the timing of S&P's announcement, of which euro zone governments were forewarned yesterday morning several hours before the ratings agency issued a public statement.
The governor of the Bank of France, Christian Noyer, said that S&P's warning was "totally inopportune... after a Franco-German agreement on an extremely powerful governance package."
"When you look at how Standard & Poor's argues its point, you can see that the methodology has evolved and is now more linked to political factors than to economic fundamentals," he said.
The head of the euro zone finance ministers grouping, Jean-Claude Juncker, joined Noyer in lashing out at S&P's warning, telling German radio it was "completely over the top and also unfair."
"After the very substantial efforts in the euro zone in recent days to get the debt crisis under control, this warning comes as crushing blow," said Juncker, who is also prime minister of Luxembourg. "We are on the way to solving the debt crisis. We're consolidating, we're reforming and we're also reforming the way Europe is governed," he said.
German Finance Minister Wolfgang Schaeuble said that the S&P warning was a good way of concentrating minds before the summit and raising pressure for an agreement.
Merkel and Sarkozy's plan yesterday backed automatic sanctions against any EU member state with a public deficit exceeding 3% of gross domestic product. S&P's warning threatened a one-notch cut to the hallowed AAA ratings of Germany, The Netherlands, Finland, Luxembourg and Austria.
France, also AAA-rated and the euro zone's second-largest economy, could be hit with a two-notch cut, as could the other countries currently rated below AAA.
S&P said it would complete a review of the 15 countries' ratings "as soon as possible" following the EU summit.
Commission eurobonds plan could annoy Merkel
Reports say EU president Herman Van Rompuy will suggest that EU leaders open the road to issuing joint eurobonds at a summit on Friday. This is according to a draft report obtained by news agency AFP.
The draft report, prepared with European Commission chief Jose Manuel Barroso, calls for "opening up the possibility, in a longer term perspective, of moving towards common debt issuance" in exchange for tighter budgetary discipline.
The suggestion is likely to irritate German Chancellor Angela Merkel, who is opposed to the idea of mutualising debt in the euro zone. She finally won the support of French President Nicolas Sarkozy on Monday when the French leader said they saw eye to eye on the question.
In his report, Van Rompuy says "any steps" towards the pooling of funding instruments "would have to be commensurate with a robust framework for budgetary discipline and economic competitiveness to avoid moral hazard and foster responsibility and compliance."
Geithner 'encouraged' by European reform pledges
US Treasury Secretary Timothy Geithner said today that the world was watching European leaders as they grapple with the euro zone debt crisis but welcomed what he called encouraging signs.
Geithner said he was "very encouraged by developments in Europe in the past two weeks, including reform commitments in Italy, Spain and Greece and new progress towards a fiscal compact."
Speaking after talks with German Finance Minister Wolfgang Schaeuble in Berlin, Geithner told reporters the rest of the world was closely following the political decisions aimed at steering the euro zone back to stability.
But he acknowledged that the US had its own daunting problems to solve. "I just want to say that although the eyes of the world are very much on Europe now, as an American, I want to make it clear that we face very challenging economic challenges in the US still," he said. "We have a lot of work ahead of us."
Geithner, who is on a European tour, said Washington hoped the EU's economy would emerge stronger from the crisis.
"I'm here in Europe of course to emphasise how important it is to the US and the world economy as a whole that Germany and France succeed, alongside other European countries in building a stronger Europe."
At a two-day EU summit beginning Thursday dubbed the last chance to save the euro, leaders will thrash out proposals laid down by France and Germany to change the bloc's framework.
German Chancellor Angela Merkel and French President Nicolas Sarkozy want changes to the EU treaty to make punishments automatic for countries that break debt laws.
They also called for monthly meetings of euro zone leaders as a form of euro government and individual members of the bloc to enshrine strict budgetary discipline in their laws while rejecting any form of pooling debt together.
Schaeuble for his part said there had been "huge progress" in the preparation for the summit. "The objective is to set down a clear signal which will allow us to restore confidence to the markets," the minister said.
At an EU-US summit last week, President Barack Obama told top European officials they must act now, with decisive force, to fix the debt crisis which threatens to derail the fragile US recovery.
"This is of huge importance to our own economy," Obama said after hosting the head of the European Commission and the European Council at the White House.
Geithner came to the meeting with Schaeuble fresh from talks in Germany's financial capital Frankfurt with the head of the European Central Bank Mario Draghi and the chief of the Bundesbank, Jens Weidmann.
Asked whether the ECB could play a more aggressive role in the crisis, by buying bigger amounts of government bonds - a controversial topic in Europe - Geithner insisted on the bank's independence.
He also said the US would "continue to support a constructive role" by the International Monetary Fund in the crisis. "Of course, the IMF exists in some ways for this purpose, to help members meet their financial needs provided they are willing to meet the IMF's conditions," he said.
Geithner's next stop is Paris where he will meet Sarkozy and Finance Minister Francois Baroin. He will then travel to the southern French city of Marseille where Europe's conservative leaders are gathering before the summit and hold a bilateral meeting with Spain's Prime Minister-elect Mariano Rajoy.
His final stop was expected to be to Italy, in the eye of the euro zone storm, where he will hold talks with Prime Minister Mario Monti.
Meanwhile, British Prime Minister David Cameron said this evening that he would block a new European Union treaty proposed by France and Germany aimed at saving the euro, if British demands are not met.
He said a new treaty must contain "British safeguards".
"I won't sign a treaty that doesn't have those safeguards in it, around things like, of course, the importance of the single market and financial services," Cameron said.
