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Letta says downgrade shows EU still under watch

Summit approves banking deal yet credit rating dominates debate

20 December, 16:50
Letta says downgrade shows EU still under watch (By Sandra Cordon) (ANSA) - Rome, December 20 - The decision Friday by rating agency Standard & Poor's (S&P) to lower the European Union's long-term credit rating is a clear signal that the region has not yet fully put the eurozone debt crisis behind it, Italian Premier Enrico Letta said Friday. He spoke shortly after S&P reduced the EU's long-term credit rating by one notch, from a top grade of AAA down to AA+, with a stable outlook.

The downgrade was a "demonstration that the transition (from the European debt crisis) is not over and that the EU and the euro are still under observation," Letta told a news conference held after a summit of European leaders in Brussels.

There, leaders approved new measures dealing with failing banks - measures that had been hammered out by European finance ministers after lengthy meetings and aimed at taking the EU towards a full banking union.

Letta hailed the new arrangement towards a single-resolution mechanism (SRM) to deal with bank failures "as a big step forward". The idea is that the next time a bank defaults, the process will be managed so as to avoid jeopardizing the wider financial system and State treasuries. Among the new rules is a plan for an industry-financed 55-billion euro fund, which some critics say will not be enough.

Others say the new plan is too cumbersome. The European Parliament's president, Martin Schulz, is one such critic, tweeting that the "system for rescuing or liquidating failing banks needs to be simpler, more effective".

In another tweet, Schulz warned that the "European Parliament cannot accept the single resolution mechanism for failing banks," as agreed to by EU leaders.

The parliament's approval will be necessary to implement the new SRM.

A banking crisis was a significant factor in the broader eurozone crisis - which also included a sovereign debt and growth crisis -that began in 2009 and lingers. However, the subject and the summit were overshadowed by the credit rating downgrade from the New York-based ratings agency.

The EU's credit rating on short- to medium-term loans remained unchanged at A-1+, with the outlook stable.

In a note, S&P explained the downgrade by saying that "the overall creditworthiness of the now 28 European Union members states has declined".

S&P added that the EU's financial picture has "deteriorated" and its cohesion has "loosened". It said it was troubled by disagreements among member countries on funding the EU, as well as sovereign debt crises in several states.

These factors are "signaling what we consider to be rising risks to the support of the EU from some member states," the agency added.

The threat of a credit-rating downgrade has lingered over the EU for years, and was presaged by a "negative outlook" presented in January 2012.

As well, some EU members have seen their own credit ratings cut in recent months. Credit ratings affect an institution's ability to borrow money as well as the level of interest it is forced to pay when it raises money.

Olli Rehn, commissioner for economic and monetary affairs, said the EU leadership did not agree with the S &P assessment, noting that European states have always met their obligations to fund the EU budget.

"The [European] Commission disagrees with S&P that member states obligations to the budget in a stress scenario are questionable," said Rehn.

"All member states have always, and also throughout the financial crisis, provided their expected contributions to the budget in full and in time". Despite his cautious words on Friday, earlier this week, Letta suggested that he saw at least hints of a nascent recovery from Italy's longest recession since the Second World War.

"The seeds of the recovery that we have ahead of us are sprouting in these days, in these weeks," Letta said.

After eight consecutive quarters of negative growth, the country's gross domestic product (GDP) was flat in the July-September period with respect to the previous three months.

The government forecasts that Italy will return to positive growth in the fourth quarter of this year and Letta has said that he was confident Italy's economy can grow 1% next year and 2% in 2015.

Italy's deep downturn was made deeper still by EU-mandated austerity measures adopted last year by the emergency technocrat government of Letta's predecessor, Mario Monti, to avert a Greek-style financial meltdown.

Letta has been leading calls for Europe to focus increasingly on promoting growth and jobs, while maintaining budget discipline, and has vowed that Italy's duty presidency of the EU will take this forward in the second half of 2014.