Greek debt deal hit by eurozone ratings downgrades

Greek debt deal hit by eurozone ratings downgrades

Hopes of a Greek debt deal were undermined on Friday night after Fitch downgraded the ratings of five eurozone countries, including Italy and Spain.

Olli Rehn, the European Commissioner for economic and monetary affairs, cheered markets by claiming a deal to end Greek's debt impasse was "very close" but hopes were hit by the rating agency's actions.


Following similar action from rival Standard & Poor's (S&P) earlier this month, Fitch downgraded Italy, Spain and Slovenia by two notches and Belgium and Cyprus by one notch. Fitch took no action on France's AAA credit rating despite S&P downgrading the country two weeks ago.


The rating agency warned that the eurozone crisis would only be resolved "as and when there is broad economic recovery" and with "greater fiscal integration".


It was also being reported last night that the German government wants Greece to hand over control of tax and spending decisions to a 'budget commissioner' appointed by the rest of the eurozone, before the country gets its second bail-out.


The budget commissioner would have to power to veto decisions made by the Greek government, according to a proposal seen by the Financial Times, marking a significant step-up in the EU's powers over the sovereign governments of member states.



The Fitch downgrades came just hours after Mr Rehn told delegates at the World Economic Forum in Davos that the next three days would be crucial for the future of the eurozone, ahead of the EU leader's summit on Monday.

"We are very close to agreeing a private sector deal in Greece, if not today then over the weekend, and in any case in January rather than February."

Mr Rehn also revealed that he wrote to Belgium, Cyprus, Malta, Hungary and Poland in November to warn they were in danger of missing their fiscal targets, and that if they did not take further action they might incur fines.

Christine Lagarde, managing director of the International Monetary Fund (IMF), said there were still "big worries" centred around the eurozone debt crisis.

Speaking in Davos she said: "There is a combination of worries about the banking sectors around the world, big worries about what the eurozone will do going forward and how they will bring together all the forces that they need to produce what they call the fiscal compact, new government rules, a firewall, which is what I certainly advocate."

Mario Draghi, President of the European Central Bank, told WEF delegates that Europe's banks had narrowly escaped a major funding crisis because of action taken by the Bank over the past two months.

He said policymakers were aware that the first quarter of 2012 would be a tough period for the banking system because €230bn (£193bn) of bank bonds would soon be due be repaid, and inter-bank lending was drying up.

The ECB cut interest rates twice, launched three-year, long-term, refinancing operation loans, and revised eligibility rules for collaterals.

"So we know for sure we have avoided a major, major credit crunch – a major funding crisis," Mr Draghi said.

Eurozone finance ministers said that while there were still considerable challenges ahead, they believed in the future of a united eurozone.

The German, French and Spanish finance ministers agreed that the creation of eurobonds – promoted by Ms Lagarde – would not be appropriate at the present time because significant structural reform of the eurozone would be needed first.

Angel Gurría, secretary-general of the OECD (Organisation for Economic Co-operation and Development), expressed frustration at inaction among eurozone policymakers.

"We know what the solutions are, we know we have to deal with Greece; banks; capitalisation, the size of firewalls and unemployment and we know we have to deal with inequality, but we don't," he said.

"The firewall, the big bazooka, needed to be there six months ago, but it is not there today and the losses accumulate," he said."

Mr Gurría said eurozone countries failed to get the sequence of events correct when the euro was first created. "We decided to have a common currency before we decided on a common fiscal policy."

Underlining the continued pressure on Spain, unemployment in the fourth quarter rose to the highest level in 15 years, with the jobless rate rising to 22.9pc – or 5.27m people – in the fourth quarter, up from 21.5pc in the third.

In response to Fitch's ratings action, a spokesman for the Spanish finance ministry said: "The government is aware of the imbalances in the economy and that's why it's launched an ambitious programme of structural reform that will be completed in the first quarter."

Separately Christoph Rosenberg, the IMF's Hungary mission chief, urged Hungary to "dispel the impression" the independence of its central bank was at risk.

"The legislation passed at the end of 2011 has given the impression that the government is trying to exert influence on the decision-making of the central bank.

"They should be clear: monetary policy is conducted by those who are charged with it, not by the government," he said.

Meanwhile, Reuters reported that Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package.