European leaders are under renewed pressure to boost the firepower of the EU’s multibillion-euro bailout package after Belgium’s credit rating was cut.
Moody’s downgraded Belgium by two notches to Aa3, its fourth highest rating. It warned that indebted eurozone countries such as Belgium will find it increasingly hard to fund their debts or achieve economic growth in the face of Europe’s austerity drive.
“The fragility of the sovereign debt markets is increasingly entrenched and unlikely to be reversed in the near future,” warned Moody’s.
Rival ratings agency Fitch earlier said it would consider cutting Belgium’s credit rating, along with those of Spain, Italy, Slovenia, Cyprus and Ireland. France’s AAA credit rating remained intact for another day, although Fitch did revise its outlook down to “negative”.
The latest credit rating changes came on the day that the EU released details of the “fiscal compact” deal designed to rescue the euro and prevent countries from going bust. This was published amid concerns over rising bad debt levels in European banks and the growing dependence of major lenders on funds provided by the European Central Bank.
French president Nicolas Sarkozy and German chancellor Angela Merkel said the fiscal compact could go ahead with the backing of just nine of the eurozone’s 17 members. It will allow Brussels to enforce greater budgetary control and provide a solid firewall against shocks from the financial system.
But Fitch said the wrangling over fundamental aspects of the compact and the failure to clearly identify who will pay if the plan fails was undermining its standing with the markets.
As if to emphasise this point, the new prime minister of Italy, Mario Monti, openly disagreed with Berlin over the speed and severity of proposed cuts to public spending. He warned that further demands from the EU for cuts would undermine his efforts to bring stability and threaten a north-south eurozone split.
Monti said that Europe’s response to the debt crisis “should be wrapped in a long-term sustainable approach, not just to feed short-term hunger for rigour in some countries”.
He added: “To help European construction evolve in a way that unites, not divides, we cannot afford that the crisis in the eurozone brings us … the risk of conflicts between the virtuous north and an allegedly vicious south.”
Monti is under pressure from Italian unions, which have warned that the country risked a “social explosion” if the technocrat prime minister pressed ahead with huge spending cuts and tax rises.
Public sector workers are expected to join a nationwide strike on Monday after MPs in Rome backed a €30bn (£25bn) austerity programme that includes an increase in VAT to 23% and a rise in the pension age, eventually up to 70. The cuts package was approved by 495 votes to 88. Had it been defeated, Monti and his government of technocrats would have been forced to resign exactly a month after the economist was sworn in with the task of keeping Italy from being the next victim of Europe’s debt crisis.
On the bond markets, Italy’s borrowing costs declined along with those of Spain after the European Central Bank intervened to buy Italian and Spanish debt from some of the continent’s worst-hit banks. Deutsche Bank and BNP Paribas were downgraded on Thursday after repeated concerns that their loans to southern European countries could become worthless.
The eight-page compact being touted by Sarkozy and Merkel as the answer to the eurozone’s debt and deficit crisis confers new powers on the European Court of Justice for policing balanced budget legislation limiting national debt levels in all eurozone countries, and commits the signatories to quasi-automatic penalties against countries that break the 3% maximum limit on budget deficits, with the European Commission as the referee.
The first draft of the “fiscal and stability compact” – agreed at a watershed EU summit last week in which Britain deployed its veto – was circulated to the 27 governments of the EU ahead of what promises to be acrimonious negotiations starting next week.
A simple majority of eurozone countries – nine of 17 – would see the “fiscal union” come into force within a month of the nine ratifications, a move clearly designed to stymie, for example, a no vote in a potential Irish referendum or a rejection by other eurozone parliaments.
Senior EU officials confirmed that all 27 EU governments, including veto-wielding British, would be involved in the negotiations, though the UK was being accorded mere “observer status” in the talks, according to the officials. British sources contested that second-rank status.
David Cameron’s unprecedented veto last week thwarted German plans to anchor the new pact in a revised EU Lisbon treaty, forcing the other 26 to take the “second-best” route of forging a new international treaty between governments which may not contradict the Lisbon treaty.
The two main innovations going beyond the existing stability pact governing the euro are the automatic sanctions for those breaking deficit limits, and a “debt brake” that pledges participating countries to enact balanced budgets and ties their hands on public spending and borrowing. Two EU institutions – the court of justice and the European Commission – would be empowered to rule on conformity with these stipulations and the commission would effectively be charged with imposing fines.
The aim is “to encourage and, if necessary, compel the member state to reduce a deficit,” the draft stated.
