S&P says Franco-German fiscal plan promising

NEW YORK, Dec 6 - A plan by France and Germany to increase fiscal integration in Europe is "promising" and could help avoid a mass downgrade of euro zone countries by Standard & Poor's, a director with the ratings agency said on Tuesday.

Frank Gil, senior director of European sovereign ratings at S&P, said Friday's crucial EU summit could be seen as successful if leaders came up with "some indication" they have a strategy to spur economic growth and share fiscal and financial risks.

"There could be at least what we heard already from the French and the Germans, (which) looks potentially promising: a shift toward some sort of fiscal transfer, some sort of fiscal sharing," he said in an interview with Reuters Insider.

To watch the full interview: http://tinyurl.com/7944gsc

S&P on Monday issued an unprecedented warning that it could downgrade nearly all euro zone members, including top-rated countries such as Germany and France, if leaders fail to reach an agreement on how to solve the region's debt crisis.

S&P's move increased pressure on policymakers to act quickly. It could also give a boost to a plan by French President Nicholas Sarkozy and German Chancellor Angela Merkel to impose mandatory penalties on countries that exceed deficit targets.

By sounding its alarm, S&P is not expressing concern that EU leaders are unable to identify the issues plaguing the euro zone, but rather they might not act in a "timely manner," said the S&P director.

"It's clear that so far the policy responses to the pressures on sovereigns and commercial banks in Europe simply haven't gone far enough," Gil said.

"Some of the initial efforts to improve confidence have backfired," he added, citing the fact that a bailout fund created to backstop troubled euro zone countries "hasn't been fully implemented yet."

The fund, also known as European Financial Stability Facility, or EFSF, could also have its AAA rating cut soon if the countries which guarantee its financial obligations are downgraded, S&P said on Tuesday.

FINANCIAL SECTOR RISKS

How to save troubled European banks without jeopardizing the finances of specific countries is another issue that needs to be addressed by EU leaders, Gil added.

"In the past we've also pointed out the need to partly delink sovereign from financial sector risk by creating a mechanism which could recapitalize European banks independently of their underlying sovereigns," he said.

Gil cited the Netherlands as an example of a competitive economy with low government debt that could get hurt by its banks' exposure to other euro-zone countries.

"Their banking system is roughly four times the Dutch GDP, and if you look at their external asset exposure, you can see how exposed they are threw the financial sector to other euro zone countries and economies," he said.

Such interdependence, Gil recalled, has caused competitive economies such as those of Germany and the Netherlands to contract more than the Spanish economy did in 2009, when the global financial crisis threw most countries into recession.

(Editing by Dan Grebler and Neil Stempleman)

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