S&P said it made made its decision because of a ‘belief that systemic stresses in the eurozone have risen in recent weeks to the extend that they now put downward pressure on the credit standing of the eurozone as a whole’. To be fair, that does reflect the fact that a) eurozone nations are now finding it more and more difficult (not to mention expensive) to borrow, and b) that if one of the group’s larger economies - Italy, for example - defaulted, the entire region would be up the creek without its proverbial paddle. Plus, there’s now a significant risk of recession. So in some respects, this has been coming for a while.
And yet, and yet: the move is undoubtedly a bold move by S&P, suggesting as it does that the ratings of the 15 countries in question now have a one in two chance of being downgraded within 90 days. Any outrage from investors is more to do with the announcement’s timing, though, than anything else: after all, with France and Germany having just tabled their plans to save the euro, you’d have thought the ratings agencies would have a little bit more confidence. And if Germany and France do lose their AAA rating, that would up the cost of borrowing for the European Financial Stability Facility (the European bailout fund). So in that respect, fiscal union becomes even more important after S&P's announcement. Investors were clearly more than happy to follow S&P's lead, though: after the announcements, the euro dropped by 0.5% against the dollar, to $1.338.
So it’s now more important than ever that the results of yesterday’s Merkozy power lunch have the right effect. The idea is that when the pair present their plans to an EU summit on Friday, all 27 states will leap to sign up to them. That might be easier said than done, though - particularly given that part of the new treaty will force countries to undergo greater checks on their budgets (and sanctions if they run up a deficit of more than 3% of GDP), which has put David Cameron in a rather uncomfortable position.
Because while he promised to ‘make sure Britain gets something in order to enhance, protect, defend and promote our national interest in Europe’, there have already been rumbles of dissent from Tory MPs. And although Merkozy has insisted that if worst comes to worst, a treaty signed by just the 17 eurozone countries would be enough, they’d still prefer all 27 EU members to get involved. We’ll have to wait to see how the hard-line eurosceptics react to that...