Standard & Poor's warned on Wednesday that credit ratings in the euro zone could come under renewed pressure if large parts of the currency bloc slip back into recession, as expected, next year.
David Beers, the global head of sovereign ratings at S&P, also said on Wednesday he expected the European Central Bank (ECB) and euro zone governments to come to some sort of accommodation on how to resolve the spiraling sovereign debt crisis.
With so much at stake, one would expect that some accommodation can be found between euro zone monetary authorities and national policy makers that balances substantive government policy actions with more aggressive steps by the ECB to counter a renewed economic downturn, Beers said in a speech in Dublin.
Such steps of course would entail closer policy coordination and a redoubled political commitment at the euro group and EU levels.
The ECB is under growing pressure from world leaders to do more to address a debt crisis that has reached the core of the 17-country euro zone. German opposition is preventing the ECB from being potentially tapped as a lender of last resort.
But Beers said Germany's perceptions of how to deal with the crisis may change after a rise in its own borrowing costs.
It's quite telling that there has been upward pressure on yields in Germany - it might begin to change perceptions in Germany, he said.
The German central bank was forced to buy large amounts of bonds at an auction on Wednesday, in one of its worst bond sales since the launch of the euro.
DOWNWARD PRESSURE ON RATINGS
Beers warned that recession in large parts of the euro zone may be difficult to avoid next year if yields on sovereign bonds remain elevated and bank balance sheets continue to contract.
The euro zone's private sector contracted for a third month in November and purchasing manager surveys on Wednesday pointed to the euro zone economy shrinking 0.5-0.6 percent in the fourth quarter after 0.2 percent growth in the third quarter.
The financial dynamics unleashed by the ongoing confidence crisis, in Standard & Poor's view, have heightened the risk of renewed recession in a growing number of euro zone members that potentially could put additional downward pressure on (the) euro area's sovereign ratings, said Beers.
This risk, I regret to say, looks unlikely to diminish quickly.
As and when a broad-based recovery takes hold in the euro zone, past experience suggests that the pace of economic growth will underperform relative to past trends.
Further cuts to euro area debt ratings would further increase the countries' borrowing costs, further complicating the bloc's efforts to extricate itself from a prolonged crisis.
France is currently at risk from losing its coveted AAA status after Moody's rating agency warned on Monday that a sustained rise in its debt yields coupled with weakening economic growth could harm its ratings outlook.
(Writing by Carmel Crimmins; Editing by Ruth Pitchford, Ron Askew)