A threat by Standard & Poors to slash credit ratings across the euro zone sounded a clarion call on Tuesday, which could help Nicolas Sarkozy and Angela Merkel force through a change to the European Union treaty at a summit this week. The French president and German chancellor are determined to change European rules to impose mandatory penalties on countries that exceed deficit targets, aiming to restore market confidence and prevent a sovereign debt crisis spiraling out of control. Citing “continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis,” S&P threatened to cut the credit ratings of 15 countries, including Germany and France, by 1-2 notches. The US-based ratings agency went a step further on Tuesday, placing the top-notch rating of the euro zone's rescue fund, the European Financial Stability Facility (EFSF), on negative watch since it depends on the creditworthiness of the currency bloc's six AAA-rated sovereigns. S&P also warned of slowing growth amid so much austerity, predicting a 40 percent chance of a fall in euro zone output. A downgrade could automatically require some investment funds to sell bonds of affected states, making those countries' borrowing costs rise still further. Merkel brushed off the threat. “What a ratings agency does is its own responsibility,” she said, promising European leaders would make decisions at this week's summit that would restore confidence. Her finance minister, Wolfgang Schaeuble, said the wake-up call was S&P's way of urging European leaders to act, and reflected financial market uncertainty rather than economic fundmentals. “It is simply an appeal to the heads of state and government that on Dec. 9 everyone has to do their duty,” Schaeuble told a panel discussion in Vienna. Jean-Claude Juncker, chairman of the 17 euro zone finance ministers, said he was “astonished” by S&P's announcement. He said it as “a wild exaggeration and also unfair” and said it failed to take into account a new austerity plan for Italy.
