Today’s summit held in Brussels by the leaders of the European Union will propose solutions to Europe’s sovereign debt crisis.
At the summit, which will be held over today and tomorrow (Thursday and Friday), the European heads of state are expected to rewrite EU treaties in line with tougher budget allocations for the eurozone.
However, should the EU leaders fail to agree on a solution in today’s summit, rating agency Standard and Poor’s is threatening to downgrade the eurozone countries’ sovereign debt.
The knock-on effect of this would mean that eurozone lenders would be the first to suffer as bank downgrades will increase the cost of government debt, and in turn increase bank debt.
In a statement, the association for export credit and investment insurers, the Berne Union has voiced concerns about the impact a non-decision will have on world trade.
“Despite the coordinated Central banks’ actions over the last months we need quick and powerful solutions this week”, says Johan Schrijver, president of the Berne Union.
He adds that with the eurozone remaining a major destination for exports from other countries, no decisions will lead to a decline in world trade in both developed and developing countries.
“The Euro’s volatility has led to a sharp drop in trade confidence, while trade is the most important medicine for the financial crisis,” he says.
Jason Karaian, financial services industry analyst at the Economist Intelligence Unit states: “As if any extra incentive was needed, the threat of mass credit-rating downgrades will focus the minds of EU policymakers as they try to hammer out a deal in Brussels. S&P’s justification for its gloomy outlook on the eurozone is not particularly controversial, but the timing of its report shows a certain moxie.
“Given recent attacks on ratings agencies by European officials, S&P’s rebuke of the “reactive and insufficient policy responses” by those same officials shows that the agency is not cowed by recent threats. The more that the credit ratings agencies assert their independence, the less that officials will be tempted by a shoot-the-messenger strategy instead of getting their fiscal houses in order,” he says.