Ratings Agency Downgrade Merkel Blasts Hollande as Spain Worries Increase

German Chancellor Angela Merkel made it clear on Thursday that she was not prepared to renegotiate the European Union fiscal pact as demanded by French presidential candidate François Hollande. Her comments come as ratings agency Standard and Poor's downgraded Spain two notches.

German Chancellor Angela Merkel hopes that French President Nicolas Sarkozy wins his re-election battle.

German Chancellor Angela Merkel hopes that French President Nicolas Sarkozy wins his re-election battle.

With the dark clouds of the ongoing euro crisis thickening over Spain this spring, German Chancellor Angela Merkel on Thursday staunchly defended her focus on euro-zone austerity and once again insisted that the EU fiscal pact, signed in March, would not be revisited.

In comments clearly aimed at French presidential candidate François Hollande, Merkel told Germany's WAZ media group that the pact "cannot be renegotiated." The Socialist Hollande has suggested that, if he emerges victorious over French President Nicolas Sarkozy in the second round of elections on May 6, he would ask for changes to the agreement. The fiscal pact, which imposes strict new rules governing budget deficits and sovereign debt, was signed by 25 of the 27 European Union member states. The UK and Czech Republic declined to join.

Hollande's reply was not long in coming. Speaking to broadcaster France 2 on Thursday evening, he said: "It is not Germany that will decide for the entirety of Europe." When asked what he plans to say to Merkel should he win the election, he said: "I will tell her that the French people had made a decision that envisages a renegotiation of the pact."

The media back-and-forth comes as the US-based ratings agency Standard & Poor's on Thursday downgraded Spain's long-term credit rating by two notches to BBB+. The agency also gave Spain a negative outlook, meaning that further downgrades could come in the near future.

In making the downgrade, S&P cited the "increasing likelihood that the government will need to provide further fiscal support to the banking sector." The agency likewise noted its view that "the strategy to manage the European sovereign debt crisis continues to lack effectiveness."

Preparing for a Hollande Victory

The downgrade could potentially worsen Spain's already dicey situation. Risk premiums on Spanish government bonds have risen recently, even topping 6 percent earlier this month, as investor doubt about the country's ability to service its long-term debt have risen. The S&P downgrade could make investors even more wary.

Spain's banking industry is also facing significant difficulties despite recent European Central Bank moves to inject liquidity into the sector. Media reports have recently indicated that EU leaders are considering allowing the euro bailout fund to provide money directly to banks instead of only to member-state governments. The move is widely seen as a response to the Spanish banking crisis.

Merkel remains adamantly opposed to such a move as it would nullify provisions that require states seeking help from the EU bailout fund to adhere to strict austerity and reform measures.

Indeed, it has been the German chancellor's energetic championing of austerity that has led her to throw her support behind Sarkozy's re-election campaign at the expense of Hollande. The French Socialist has said he would emphasize economic growth over austerity, even if it meant the need to take on new debt.

Still, despite the apparent differences in approach, Hollande's lead in the polls just 10 days before the vote has led the two of them to begin softening their rhetoric to prepare for the eventuality of a Hollande victory. The French Socialist has vowed that he would immediately fly to Berlin for consultations with Merkel should he win. And Merkel on Thursday told WAZ that growth "has long since become the second pillar of our policies." She also said that "two pro-European politicians" were competing in the French presidential run-off.

cgh -- with wire reports


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