The euro zone hardly needed a reminder of the necessity for urgency as it searches for a strategy to contain its ongoing debt crisis. But that's what it got this week. Standard & Poor's announced on Friday that it was downgrading Spanish debt by a notch, joining the ratings agency Fitch, which slapped both Spain and Italy with negative marks last week.
Potentially even more concerning, however, is a shot fired over the bow of European banks by Fitch on Thursday evening. It placed several financial institutions on its watch list, suggesting that they might be downgraded. Among them was German market leader Deutsche Bank, long considered a model of financial health, despite the global crisis.
"These institutions' business models," said Fitch in a statement, "are particularly sensitive to the increased challenges the financial markets are facing."
Joining Deutsche Bank on Fitch's list of banks that may face a downgrade in the near future are Bank of America, Credit Suisse as well as France's BNP Paribas and Societe Generale. Morgan Stanley and Goldman Sachs are also at risk of a downgrade. The ratings agency also announced on Thursday that it had dropped the Swiss bank UBS by a notch.
Taken together, the announcements by Standard & Poor's and Fitch provide the latest evidence that the financial world is increasingly doubtful about Europe's ability to solve its ongoing debt and currency crisis. Several European banks are heavily exposed to Greek debt. With European officials considering a larger debt haircut for Greece than the 21 percent agreed to in July, many banks could be facing significant write-downs. Bloomberg reported on Thursday that several German banks joined a teleconference to discuss possible losses of between 50 percent and 60 percent on Greek bonds.
Trouble Reaching Consensus
So far, the euro zone has had trouble reaching a consensus on what should be done. There have been reports that a mandatory recapitalization plan is under consideration for systemically important European banks -- an idea that Deutsche Bank head Josef Ackermann blasted on Thursday. Many have also urged that the euro backstop fund, the European Financial Stability Facility, be leveraged so that it can provide more firepower in shoring up European banks. The EFSF, in the final phases of implementation, is seen as too small should the debt crisis contagion spread to Spain and Italy.
Indeed, a European Union summit originally planned for this week had to be postponed until Oct. 23, reportedly due to a disagreement between Germany and France over how to proceed. Both countries have denied that interpretation.
The international community is becoming increasingly concerned at what is seen as European dawdling. According to a report in Friday's Financial Times, several developing countries are interested in bolstering the International Monetary Fund so it can either provide greater lines of credit to Greece and, if needed, to Spain and Italy. The paper writes that both China and Brazil are in favor of such a plan, in the hopes that the G-20 can make a confidence-boosting announcement at their summit next month.
The paper quotes an unnamed European official as saying: "We're increasingly coming to the view that the euro-zone crisis is too big a problem for Europe to solve on its own. If you want to sort it out properly you need American or Chinese money, which means the IMF."
Finance ministers and central bank chiefs are in Paris on Friday to prepare for next month's G-20 summit. The meeting, a French Finance Ministry official told Reuters, "takes place in a context where the absolute priority for the success of the G-20 is to find the elements for the stability of the euro zone."