IRELAND MAY BE FORCED to pay higher interest rates on its EU-IMF bailout after ratings agency S&P put 16 eurozone countries on negative watch – indicating a fifty-fifty chance that each could have its credit rating lowered within 90 days.

Standard & Poor’s has put the 16 countries – every euro member except for Greece – on ‘creditwatch negative’, citing “tightening credit conditions across the eurozone” and the rising yields on each of their bonds.

It also blamed “continuing disagreements among European policy makers on how to tackle theimmediate market confidence crisis” and high levels of government and household debt throughout the eurozone.

The move to ‘negative’ means that each of the countries may be formally downgraded within three months – though S&P said it would conclude the review of each country as soon as possible after this week’s summit of EU leaders in Brussels.

The only country not to be put on a negative watch is Greece, with S&P explaining that its CC rating already means there is a “relatively high near-term probability of default” in Greece’s case.

Any downgrade to the ratings of France and Germany would mean that the EU bailout fund, the EFSF, would be similarly downgraded – meaning it would have to pay higher interest rates on the bonds it issues to pay for Ireland’s bailout.

Ireland, in turn, would therefore face a higher interest rate on the EFSF portion of its bailout, which amounts to some €22.5 billion.

Further pressure

The news comes just hours after Germany’s chancellor Angela Merkel, and French president Nicolas Sarkozy, called for a revised “tougher” European treaty in order to permanently resolve the debt crisis.

While it has been signalled for some time that France could lose its AAA status, the prospect of Germany – Europe’s benchmark economy – losing the status would throw the eurozone into even deeper turmoil.

The loss of such a status from a major economy would make it even more difficult for European economies to borrow money on the open market – and raise further questions about the viability of Europe’s current bailout mechanisms.

If France was to be priced out of the open markets, any prospective bailout would potentially empty the EFSF as it currently stands. Any impact on Germany, however, would radically alter the current thinking behind any solution.

The news will heap further pressure on EU heads of government, who will meet on Friday in Brussels to discuss ways of putting an end to the debt crisis.

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