STOCK MARKET WATCH -- Monday, 16 January 2012

[Demeter]

21. France Downgrade Creates Pressure for Merkel

http://www.spiegel.de/international/europe/0,1518,809143,00.html

With Standard and Poor's decision to punish nine euro-zone countries with downgrades and to strip France and Austria of their AAA ratings, Germany is likely to face additional burdens in the euro bailout fund in order to ensure cheap lending to save the common currency. Some are calling for Chancellor Angela Merkel to abandon plans for a tax cut in Germany. In its decision on Friday, S&P stated that Germany's rating is in excellent condition, but experts in the country fear that Berlin's contributions to the euro bailout will have to be considerably greater than initially planned. And Chancellor Angela Merkel of the conservative Christian Democratic Union (CDU) said the downgrade of the nine countries will increase pressure for all the euro-zone countries to solve their budget and debt problems.

After a meeting of CDU leaders on Saturday, Merkel said, "We are now challenged to implement the fiscal compact even quicker ... and to do it resolutely, not to try to soften it." Merkel was referring to the deal agreed in December by 26 European Union member states, with the exception of Britain, to enter into a fiscal pact that would see consolidated budget legislation in all countries and sanctions for violaters. The move by S&P, she said, had not come as a surprise. "We have taken note of this decision," she said. Merkel also noted, however, that "S&P is just one of three ratings agencies."

Frank Schäffler, the finance policy spokesman for the Free Democratic Party (FDP), Merkel's junior coalition partner, said he felt his criticism of Germany's participation in the European Financial Stability Facility (EFSF), the current euro bailout fund, had been indirectly confirmed by S&P. He said the downgrading was likely to have direct consequences for Berlin. The downgraded rating for Austria alone, he told the financial daily Handelsblatt, would mean that "Germany would no longer just have to carry 40 percent, but close to 75 percent (of the burden) to ensure the euro bailout fund EFSF retained its AAA rating."

He said the current German guarantee of €211 billion would no longer be sufficient in order to achieve the volume of aid that had been originally planned. "Over time, that will also impose a burden on the German rating," the FDP politician warned, saying that the "socialization of losses" through the bailout fund could not go on forever.

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