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(JOHN MACDOUGALL)
(JOHN MACDOUGALL)

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How S&P's 'coup de grâce' changes the game in Europe Add to ...

These are stories Report on Business is following Tuesday, Dec. 6. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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S&P's coup de grâce Standard & Poor's has upped the ante markedly for this week's EU summit with its sweeping warning on the credit ratings of 15 euro zone countries.

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The pressure was already on given the proposal by Germany's Angela Merkel and France's Nicolas Sarkozy for treaty changes that would penalize members of the 17-nation monetary union, and possibly the entire EU, for breaching the 3-per-cent deficit-to-GDP mark.

S&P said it will make its decision after the summit. While several of the 15 countries are already in the basket-case category, the credit watch does threaten the triple-A ratings of six of the stronger nations. And it appears likely that at least France will be downgraded, observers said today.

"This puts a lot of pressure on the summit to do the right thing," Carl Weinberg, the chief economist at High Frequency Economics, said in a report titled "Coup de grâce - We are not the only skeptical ones."

While the markets appear to be taking the move in stride, S&P has put a knife to the throat of those six countries, and, arguably, put the German chancellor and French president in a much better position to get what they want. S&P did not mince words when it cited the dithering politicians of the euro zone who have failed to stem the crisis after two years.

But, noted CMC Markets analyst Michael Hewson, it also creates more problems in certain of the nations.

"The downgrade threat also makes it much more politically difficult for countries that have a large euro sceptic element like Finland who are also more fiscally conservative," Mr. Hewson said.

"Given they have been more fiscally conservative they probably have more to lose and rather begs the question, why ratify a treaty change that could well precipitate a ratings downgrade? It also seems likely to raise the political pressure in Germany with respect to the costs of closer integration. This it would seem is the price of admission towards closer fiscal integration, the question now being asked around Europe in the triple-A' countries is whether it's a price worth paying."

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

Here's what S&P said were behind the decision:

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."

"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.

Carney stands pat The Bank of Canada held its benchmark rate steady at 1 per cent, warning of the mounting troubles in Europe.

Global uncertainty has heightened and Europe's sovereign debt crisis has deepened since the central bank's last policy announcement, it said, noting that "the recession in Europe is now expected to be more pronounced than the bank had anticipated in October."

While prospects in the United States have brightened somewhat, a pullback by consumers and the fallout from Europe are expected to hold back the U.S. recovery, the Bank of Canada said. And the outlook for Canada is dimming.

"On balance, recent economic indicators in Canada suggest that growth in the second half of this year is slightly stronger than the bank projected in October," the central bank said.

"Household expenditures have more momentum than had been expected and business investment remains solid. Going forward, the weaker external outlook is expected to dampen GDP growth in Canada through financial, confidence and trade channels. The economy also continues to face competitiveness challenges, including the persistent strength of the Canadian dollar."

Analysts believe the Bank of Canada under Governor Mark Carney will not be changing rates for some time yet.

"Today’s announcement is the first after the Bank released its downgraded economic forecast in October’s [monetary policy report] and strikes a slightly more dovish tone in line with the deepening euro zone crisis," said economist Leslie Preston of Toronto-Dominion Bank.

"It remains consistent with our call for the Bank of Canada to leave interest rates unchanged until the first quarter of 2013 - implying an unchanged overnight rate for over two years, an unprecedented situation which underscores the fragility of the economic recovery."

Polish firm to acquire Quadra Polish copper producer KGHM Polska Miedz SA has struck a deal to buy Canada's Quadra FNX Mining Ltd. for $3-billion.

KGHM, the world’s ninth-largest producer of copper and third-largest producer of silver, is offering $15 a share for Quadra’s copper-focussed assets in North and South America, including the promising Sierra Gorda copper project in Chile and mines in Sudbury, Ont., The Globe and Mail's Brenda Bouw reports.

If approved, the acquisition would be one of the largest in the copper sector since Barrick Gold Corp. bought Equinox Minerals Ltd. for $7.3-billion last spring. It's also the latest in a growing list of foreign miners picking off Canadian-based companies across several resources in the race for what’s left of the world’s diminishing resources.

BMO profit climbs Bank of Montreal posted a 21-per-cent gain in fourth-quarter profit today, continuing what has been a more profitable quarter for Canada's banks, though it missed analysts forecasts.

BMO profit climbed in the quarter to $897-million or $1.35 a share basic ($1.34 diluted), from $739-million or $1.24 a share during the same quarter last year, The Globe and Mail's Grant Robertson reports. Revenue rose 20 per cent to $3.88-billion.

"We are well positioned as a top-10 North American bank, with a clear and visible brand, a significantly expanded retail and wealth management footprint and a well-developed wholesale presence," said chief executive officer Bill Downe.

Precision Drilling boosts budget Canada's Precision Drilling Corp. boosted its planned 2012 spending today while disclosing it expects to take a fourth-quarter hit of $100-million to $120-million to decommission almost 50 rigs.

Precision plans to spend $1.14-billion next year, including $738-million on expansion, $232-million for maintenance and infrastructure, and $173-million elsewhere.

The expansion will see seven new drilling rigs.

“In 2012 we plan to continue to deploy capital toward rig new builds and upgrades and make investments in infrastructure, including expanding our field support presence with new facilities and logistics support investments in Texas, North Dakota and Alberta to aid Precision in continuing to reduce our operating costs, improve our up-time and customer service capabilities," said chief executive officer Kevin Neveu.

More analysts cut RIM Two more analysts have slashed their outlook for Research In Motion Ltd. stock, one to just $10 (U.S.).

"Many investors are expecting RIM’s new BBX operating system to resurrect the company next year," National Bank Financial analyst Kris Thompson said in a particularly gloomy outlook as he cut his target on RIM shares to $10 from $16.

"While we are cheering for this outcome, we have little confidence that any management team could save RIM in its current form. Turning around a $20-billion company with 17,000 global employees in a fast moving, hyper-competitive market is a massive task."

Other analysts have also cut their outlook since RIM issued a profit warning on Friday, and unveiled a major hit related to the weak launch of its PlayBook tablet.

RBC Dominion Securities analyst Mike Abramsky trimmed his target to $20 from $23, saying, among other things, that the BlackBerry maker's lower outlook "sustains concerns regarding erosion of RIM's handset franchise vs. competitors."

Business ticker

In Economy Lab Studies reject the idea among some that generous social systems in Europe are 'welfare magnets' for poor foreigners, Naomi Powell writes.

In International Business The airline industry will tell you it generates at most 3 per cent of global carbon dioxide emissions, making it only a small part of the global warming problem. True, but air travel for business, holidays and weekend breaks is shooting up through the clouds, Eric Reguly reports.

In Globe Careers When fierce macroeconomic crosswinds are blowing, even good communication, employer-employee trust, shared sacrifice and smart management cannot guarantee a soft landing, Andrew Hill of The Financial Times writes.

In Personal Finance Yields on blue chips have never been more attractive, compared to interest rates, a money manager says.

From today's Report on Business

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