Austerity calls after Europe downgrades

European leaders sought to limit damage from a ratings agency’s downgrade of nine countries on Friday, or even turn the news to their advantage, saying that it showed the need to impose more austerity or else do more to stimulate growth.

Germany’s chancellor, Angela Merkel, said on Saturday that the downgrade by Standard & Poor’s (S&P) meant the euro area must speed up measures to create a more centralised currency union.

“We are now challenged to implement the fiscal pact quickly,” Merkel said in a statement on Saturday, a day after S&P downgraded France, Austria and seven other countries — but not Germany. She added that leaders should not water down the agreement and instead quickly pass other measures they have agreed to, like limits on debt.

In Italy, Prime Minister Mario Monti used the downgrades to bolster his argument that austerity alone would not solve the crisis. Europe needs to support “national efforts in favour of growth and employment,” Monti told the newspaper Il Sole 24 Ore, according to Bloomberg News.

Standard & Poor’s, saying it doubted whether European leaders yet had a grip on the debt crisis, cut its ratings for Cyprus, Italy, Portugal and Spain by two notches Friday, and lowered those of Austria, France, Malta, Slovakia and Slovenia by one notch.

On Saturday, S&P defended its decision. “They have not achieved a solution that is sufficient in size or scope,” the S&P analyst Moritz Kraemer told reporters in a conference call, according to The Associated Press.

The downgrades did not come as a surprise and were somewhat less severe than expected. In recent weeks, there have been a few hopeful signs in Europe, including economic indicators that were better than expected, successful bond sales by countries like Italy, and a more forceful response from the European Central Bank.

“This may be why some of S&P’s actions have not been as dramatic as hinted at in early December,” Laurent Fransolet, an analyst at Barclays Capital in London, wrote in a note to clients.

S&P praised the European Central Bank, which has flooded banks with cheap loans to prevent a credit squeeze. “We believe that euro zone monetary authorities have been instrumental in averting a collapse of market confidence,” the agency said in a statement on Friday.

Spared a cut were Belgium, Estonia, Finland, Germany, Ireland, Luxembourg and the Netherlands. They were among euro zone countries placed on “credit watch with negative implications” by S&P in December.

Still, the downgrades were hardly good news, especially since moves by one ratings agency have often been followed by others. The S&P action adds to the pressure on European leaders, and strengthens Merkel as she pushes her peers to increase austerity measures.

“Germany comes out as a clear winner and will have its position at the negotiating table strengthened even further,” Royal Bank of Scotland analysts said in a note.

Merkel said the downgrades showed that euro zone countries had a lot of work to do to restore investor trust. She also said on Saturday that Europe should get its permanent rescue fund, known as the European Stability Mechanism, in operation sooner.

In line with Merkel’s call for a closer eye on budgets, Prime Minister Mariano Rajoy of Spain on Saturday pledged spending cuts and a banking-system cleanup.

“We live in a difficult moment,” Rajoy said in a speech to a convention of the People’s Party in Malaga, according to Bloomberg News. “The government that I lead knows exactly what it has to do to improve the reputation of Spain and to grow and create jobs.”

Other leaders sought to talk down the effect of the downgrades, which were expected.

“This decision is a warning that should not be turned into a drama any more than it should be underestimated,” the French prime minister, François Fillon, said, according to Reuters, adding, “The drifting off course of our public finances in the last 30 years is a major handicap for growth and employment, as well as for our national sovereignty.”

Opposition leaders sought to exploit the downgrade. François Hollande, the Socialist candidate for president of France, said the incumbent president, Nicolas Sarkozy, made preservation of France’s top rating “an obligation for his government.”

“This battle has been lost,” Hollande said at a news conference, Reuters reported. He said that it was Sarkozy’s policies, not France, that had been downgraded.

While the downgrade is a blow to France’s prestige, Italy may be the country most affected because it must refinance a large amount of debt this year.

“In normal times, this is all possible,” Ewald Nowotny, governor of the central bank of Austria, said on Austrian radio, according to Reuters. “In very nervous and difficult times, it can be a problem, and in my view, this sharp downgrade of Italy is probably one of the most difficult and problematic aspects of this sweeping blow from the ratings agency.”

S&P’s action provoked indignation among some officials. “I am astonished at the moment that S&P has chosen to downgrade euro zone countries,” Michel Barnier, European commissioner for internal market and services, wrote on Twitter. “Its evaluation does not represent current progress.”

Barnier has been a leader of efforts to impose stricter regulations on ratings agencies.

Maria Fekter, the Austrian finance minister, said, “The downgrade is bad news for Austria,” according to Reuters. “But it should wake everyone up when such a thing happens.”

© 2012 The New York Times News Service