S&P Warns of Euro Zone Downgrades if Recession Recurs

High bond yields, low bank balance sheets will drive economies down

ECB building in Frankfurt, Germany. (Photo: AP) ECB building in Frankfurt, Germany. (Photo: AP)

David Beers, who presided over the downgrade of the U.S. credit rating after the great debt debacle in Congress, said Wednesday that ratings in the euro zone are in danger of cuts should large parts of the region sink back into recession. He also warned that it could be tough to avoid such an eventuality if bond yields stayed high and bank balance sheets continued to shrink.

According to a Reuters report, Beers, global head of sovereign ratings at S&P, also said he expected the European Central Bank (ECB) and euro zone governments would arrive at some solution to the escalating sovereign debt crisis.

He was quoted saying in a Dublin speech, "With so much at stake, one would expect that some accommodation can be found between euro zone monetary authorities and national policy makers that balances substantive government policy actions with more aggressive steps by the ECB to counter a renewed economic downturn. Such steps of course would entail closer policy coordination and a redoubled political commitment at the euro group and EU levels."

However, such a belief notwithstanding, he is not optimistic about the future of the bloc's credit ratings. About those he said, "The financial dynamics unleashed by the ongoing confidence crisis, in Standard & Poor's view, have heightened the risk of renewed recession in a growing number of euro zone members that potentially could put additional downward pressure on (the) euro area's sovereign ratings." He added, "This risk, I regret to say, looks unlikely to diminish quickly. As and when a broad-based recovery takes hold in the euro zone, past experience suggests that the pace of economic growth will underperform relative to past trends."

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