Germany's Schaeuble welcomes eurozone downgrade threat

Moritz Kraemer, of Standard and Poor's: "There is a 40% probability of a recession... especially if we do not reverse the current confidence crisis"

German Finance Minister Wolfgang Schaeuble has said Standard & Poor's (S&P) threat to downgrade eurozone countries is the "best possible incentive" ahead of Friday's summit.

S&P put almost all eurozone countries on "credit watch" on Monday.

Six countries with top AAA ratings now have a 50% chance of a downgrade.

S&P added on Tuesday that it was placing the AAA rating of the European Financial Stability Facility (EFSF) bailout fund under review.

"Depending on the outcome of our review of the ratings on EFSF member governments, we could lower the long-term rating on the EFSF by one or two notches, if any," S&P said in a statement.

Question of trust

European markets were lower on Tuesday, with the Dax in Frankfurt down 1.4% and the Cac 40 in Paris down 0.8%.

The borrowing costs of Spain and Italy rose slightly, but yields on Italian 10-year bonds remained below 7%, the rate which is considered to be unaffordable.

"S&P's analysis is backward-looking, identifying the structural weaknesses in the currency union that have been conspicuous to investors for months and which the eurozone's leaders are trying to solve," said BBC business editor Robert Peston.

Mr Schaeuble said that the eurozone summit on Friday must now act to regain the confidence of investors.

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S&P cannot make or break the eurozone; only eurozone governments can do that”

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"The solution to the crisis must be... verifiable, credible and confidence-building," he said.

"The truth is markets worldwide don't trust the eurozone at all right now."

Norbert Barthle, an aide to German Chancellor Angela Merkel, said the warning could help Mrs Merkel and French President Nicolas Sarkozy to push through their plans for greater budget discipline.

But Economy Minister Philipp Roesler said: "Germany will not let itself be influenced by... the short-lived verdict of one rating agency."

"We think nothing of such threats. We have no difficulties on the financial markets. We are and remain the anchor of stability in Europe," he said.

The announcement from Standard & Poor's came after talks in Paris between the two leaders.

They said that all 17 eurozone states should should face greater checks on their budgets and sanctions if they run up deficits, and that a new treaty should be completed by March to ensure such a crisis never happens again.

'Systemic stresses'

S&P announced on Monday that it had placed its "long-term sovereign ratings" on 15 eurozone nations on credit watch "with negative implications".

Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating
The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.

The ratings agency said the decision was prompted "by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole".

As well as Germany and France, Austria, the Netherlands, Finland and Luxembourg also currently have a top AAA rating.

S&P's announcement means that there is a one in two chance that those countries will see their credit rating fall within 90 days.

Analysts also say S&P's move reflects uncertainty about what would happen were a larger eurozone country - such as Italy - to default in future.

The only two countries not put on credit watch on Monday were Cyprus, which is already under review, and Greece, whose rating has already been severely downgraded.

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