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S&P warns euro zone Standard & Poor's spoiled what had been a perfectly good day for the euro zone by putting almost all the nations of the monetary union on watch for possible credit downgrades.

While many in the euro zone have already had their ratings cut, there are still six triple-A countries remaining, which are now at risk. Their ratings could be cut because of the impact of the spreading euro crisis, and decisions will be made soon. The six include Germany, France, the Netherlands, Austria, Finland and Luxembourg.

Fifteen countries were put on watch. Greece was excluded because its current ratings signal "there is a relatively high near-term probability of default" anyway. As well, Cyprus was already on watch.

"Today's CreditWatch placements are prompted by our belief that systemic stresses in the euro zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole," S&P said.

It cited several factors:

  • Tightening credit conditions across the region.
  • "Markedly higher risk premiums" on an increasing number of countries, including some in the triple-A club.
  • "Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among euro zone members."
  • High government and personal debt levels.
  • The mounting risk of recession next year: "Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40 per cent probability of a fall in output for the euro zone as a whole."

The review will focus on three areas:

  • "Political dynamics," a look at the issues that "appear to us to be limiting the effectiveness of efforts" to restore market confidence.
  • "External liquidity," an examination of the borrowing needs of both governments and banks.
  • "Monetary flexibility," a study of how European Central Bank policy is addressing the troubles.

The ratings agency said it would try to finish its review as soon as possible after the EU summit at the end of this week.

"We expect to conclude our review of euro zone sovereign ratings as soon as possible following the EU summit scheduled for Dec. 8 and 9, 2011. Depending on the score changes, if any, that our rating committees agree are appropriate for each sovereign, we believe that ratings could be lowered by up to one notch for Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg, and by up to two notches for the other governments."

The 'More Strict Treaty' Before the S&P announcement, France's Nicolas Sarkozy and Germany's Angela Merkel had put a bounce into the markets with their proposal to remake the EU along strict fiscal guidelines. But their plan is no quick fix for what ails Europe now.

The French president and German chancellor met today in the run-up to what is seen as another "make-it-or-break-it" summit later this week, and unveiled proposals for new treaty rules that would penalize member countries that go above the EU's 3 per cent deficit-to-GDP ceiling.

Mr. Sarkozy and Ms. Merkel, the leaders who have taken charge in the two-year-old euro debt crisis, said after a meeting today that they will write to the chief of the European Council this week with their proposal. They're looking at a change for the entire 27-member EU, but said they will push for this to be done in the 17-member euro zone alone if that doesn't fly. And they would allow in others.

"We want a new treaty, to make clear to the peoples of Europe, members of Europe and members of the euro zone, that things cannot continue as they are," Mr. Sarkozy said, according to Reuters.

Included would be a pledge to bondholders that they would be safe in any future restructuring of debt, unlike in Greece, where they are to take a hefty hit.

(A clever Kit Juckes, the chief of foreign exchange strategy at Société Générale SA, dubbed it the "More Strict Treaty," a play on the agreement that paved the way for the EU.)

Also buoying markets today were other signals from the embattled monetary union, notably new measures by Italy and Ireland.

"As usual it is hope for European progress keeping sentiment buoyed, with Italy's new austerity budget and the Merkel/Sarkozy meeting keeping expectations high that this time around it's going to be different, and the problem is on its way to being contained," said David Jones, chief market strategist at IG Index in London.

There are questions as to how much the Merkel-Sarkozy plan can achieve. There are already rules in place, yet the debt crisis rages.

"This will no doubt build up substantial pressure on member states in the direction of better governance," Commerzbank economist Eckart Tuchtfeld told Reuters. "However, we remain on the sceptical side as it is a willingness to live by the rules that will be decisive. The experience of the last years with the Maastricht Treaty suggests some caution here."

The issue for the bondholders is also key, said Mr. Hewson, "given that debt loads remain unsustainable." And, he noted, there are no proposals to boost economic growth, which is badly needed among the group's ailing economies, while more austerity will not sit well with the populace. The people of countries like Greece and Italy have already had enough. As well, treaty changes are time-consuming.

Many believe the way out of the crisis is for a eurobond, which Ms. Merkel rejects, and a much greater role for the European Cental Bank, which she also rejects, as does the ECB itself.

"While broadly welcome this seems just another delaying mechanism even though both Merkel and Sarkozy insist that the changes need to be passed by March next year," CMC Markets analyst Michael Hewson said of today's events.

"The timing is no accident either given that Sarkozy faces re-election in April, and his political opponents are likely to make the next few months very uncomfortable for him."

This has become a crucial week in the debt crisis, one billed as "the final chance to save the euro," as Chris Beauchamp of IG Index put it. Markets have their hopes up - stocks climbed and bond yields fell - but many observers warn it could fall flat again.

"At present everything seems to be pointing in the right direction, and investors can be forgiven for hoping that politicians finally grasp the seriousness of the problem, he said. "And yet, a feeling of déjà vu permeates markets at the moment. Too many times before, euro zone leaders have pledged their determination to end the crisis, but end up merely fudging the issue and delaying any decision until later. The fear now is that this week will turn out the same way, with fine words but little action."

So much is at stake here. Not only have the euro zone's borrowing costs been pushed up dramatically, but indicators released as recently as today suggest another recession. There are big political concerns, as well, as Germany takes the lead in the crisis amid sovereignty questions in other countries.

"Chancellor Merkel has called for countries to relinquish economic sovereignty with closer oversight on national budgets with sanctions against budget transgressors enforceable by the European Court of Justice, while France remains opposed to such severe policing on the basis of concerns about sovereignty issues," said Mr. Hewson.

"This could well be a problem for President Sarkozy, given France's recent history and the nation's suspicion about sovereignty erosion by Brussels, which was starkly illustrated when they vetoed the European constitution in 2005. If Sarkozy is even perceived to be conceding ground on sovereignty issues then he could well find himself under severe pressure, especially with an election looming in four months."

While this week's developments could help ease the crisis, there's no quick fix, as Ms. Merkel has noted.

"Merkel is right to describe the process as a marathon that will take years, just as steps toward more effective but still imperfect currency unions in the United States and Canada evolved very slowly within their respective systems," said Derek Holt of Scotia Capital. "Thus, I think optimism toward some grand immediate solution emanating from this weekend's summit is misplaced."

RIM outlook dims Analysts are slashing their outlook for shares of Research In Motion Ltd. in the wake of the BlackBerry maker's ugly profit warning on Friday.

Analysts Phillip Huang and Amitabh Pass of UBS Securities Canada cut their target to $18 (U.S.) from $26, though left their rating unchanged at "neutral" as they reduced their earnings and revenue estimates for RIM's 2013 fiscal year. They cited "no respite to RIM's ongoing challenges."

On Friday, RIM announced a huge hit related to the weak performance of its PlayBook tablet, and said its earnings this year would be lower than forecast.

The UBS analysts aren't alone. Todd Coupland of CIBC World Markets cut his target on RIM shares to $25 from $55.

Goldcorp boosts dividend Goldcorp Inc. today hiked its annual dividend by 32 per cent to 54 cents (U.S.) a share.

The company noted it's the third time in the past 13 months that it has boosted the payout.

"This action underscores Goldcorp's unique ability to generate the cash flows necessary to both invest significantly in the strongest growth profile in the gold sector and to provide regular dividend growth for the benefit of our shareholders," chief executive officer Chuck Jeannes said in a statement. "We will continue to review dividend levels at regular intervals in the future."

What to watch for this week Bank of Canada Governor Mark Carney returns to the stage tomorrow, when he's certain to again stand pat on interest rates.

"The U.S. data has looked a touch better of late but Canada's job recovery and inflation have cooled and Europe's problems if anything have worsened since the last time out," said Peter Buchanan of CIBC World Markets.

"The message, echoing recent statements from Carney, should once again be that Canadian rates remain on hold for the foreseeable future."

In the markets this week, Bank of Montreal and National Bank of Canada will close out the fourth-quarter earnings season for the country's major banks. Toronto-Dominion Bank, Royal Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Nova Scotia all reported this week.

Business ticker

In Economy Lab Miles Corak describes a five-point plan that's about including all sources of income in the tax base, and about targeting tax rate increases where they cause the least pain.

In International Business Which EU country will be next to sue for a bailout? If you guessed Italy or Spain, you might be wrong. It's likely to be Cyprus, Eric Reguly writes.

In Globe Careers Severance deals that give big cash payouts to outgoing chief executives can not only outrage shareholders, they can clobber a company's performance for years, according to a new study. Wallace Immen reports.

In Personal Finance Canadians pay higher fees than investors in other countries, but the industry says there is a cost to getting investment advice.

From today's Report on Business

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 3:57pm EDT.

SymbolName% changeLast
BMO-N
Bank of Montreal
+1.35%97.68
BMO-T
Bank of Montreal
+1.13%132.25
BNS-N
Bank of Nova Scotia
+1.21%51.78
BNS-T
Bank of Nova Scotia
+0.94%70.07
CM-N
Canadian Imperial Bank of Commerce
+1.3%50.72
CM-T
Canadian Imperial Bank of Commerce
+1.13%68.67
G-N
Genpact Ltd
+0.58%32.95
G-T
Augusta Gold Corp
+6.93%1.08
NA-T
National Bank of Canada
-0.45%114.06
RY-N
Royal Bank of Canada
+0.48%100.88
RY-T
Royal Bank of Canada
+0.29%136.62
WMT-N
Walmart Inc
-0.91%60.17

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