Reform of stability pact could hurt eurozone ratings: S&P

Agence France-Presse, Frankfurt

The international credit rating agency Standard and Poor's said on Monday that a softening of the EU's budget rules could undermine the sovereign debt ratings of some eurozone member states.

"The apparent weakness of political will among existing eurozone members to consistently pursue policies that enhance fiscal flexibility acts as a constraint on sovereign credit ratings," S and P said in a special report on the proposed reform of the EU Stability and Growth Pact set to be discussed by EU finance ministers this week.

S and P's decision last year to downgrade its debt ratings for Italy and Greece and to revise its outlook for Portugal was the result of a lack of action by these countries to improve their fiscal balances and cut debt, the agency said.

"This necessary commitment will certainly not be encouraged by any reform of the Stability and Growth Pact that signifies greater tolerance of fiscal policy slippage whenever public finances come under pressure," it said.

A weakening of the pact could therefore have a direct impact on ratings, S and P warned.

"Shorn of the reassurance offered by a well-enforced Stability and Growth Pact, we would possibly need to take an increasingly cautious view on the likelihood of eurozone members adhering to stated medium-term fiscal targets and reform strategies," the report said.

And a dilution of the pact could also affect interest rates, S and P added.

"It is also important to remember that the European Central Bank has been a consistent opponent of changing the pact. Consequently, it would quite probably respond to any perceived loosening of the fiscal rules through an offsetting tightening of monetary policy," the agency said.

S and P argued that countries' difficulties in respecting the pact's rules were not the result of the way the rules were designed but of a lack of political determination.

"The current rules themselves are not the core of the problem, but rather the lack of political will to apply them," it said.

The pact has actually played a very positive role in bringing about healthier public finances across Europe over the past decade, it added.

Investment bank Morgan Stanley, in its Global Economics publication in January, also warned about the dangers of a lack of credibility in the Stability and Growth Pact.

it argued that the "non-bailout clause in the Maastricht Treaty" should be reaffirmed as binding and that "the ECB should start to discriminate between issuers based on credit ratings when accepting collateral at the weekly refinancing operations".