S&P might downgrade EU

Bond rating agency Standard and Poors Wednesday broadened its warnings about a possible credit downgrade to include the European Union.

S&P said it was placing the EUs long-term, triple-A rating on a negative credit watch, meaning there is a 50 per cent chance of a downgrade within 90 days.

On Monday S&P issued asimilar warning for 15 of the 17 countries in the eurozoneand on Tuesday extended that to Europes bailout fund.It cited the fact that eurozone members contribute 62 per cent of the EUs budget revenues.

S&P also put some of the largest banking groups in Europe in creditwatch Wednesday, including Deutsche Bank, BNP Paribas, Commerzbank, Credit Agricole, Barclays Bank Ireland and units of Rabobank.

A downgrade generally increases the costs of borrowing.

Financial markets barely reacted, and remained in wait-and-see mode ahead of this week'sEuropean summit in Brussels to see if it will produce a convincing deal to resolve the regions debt crisis.

Investors were cheered by comments from French Finance Minister Franois Baroin earlier in the day that the summit would be successful.

"Neither [French President] Nicolas Sarkozy nor [German Chancellor] Angela Merkel will leave the negotiating table of this summit until there is a powerful deal," Mr. Baroin told Canal+ television.

But later, hopes dimmed when a German official said the governments appear unlikely to reach a deal this week. The official said it could take until Christmas.

InToronto, the S&P/TSX closedup 67.48points at 12,148.73. In New York, the Dow Jones Industrial Averageadded46.24 points at 12,196.37.

Europe's markets, whichclosed before the S&P announcement, ended lower. London's FTSE 100 index lost0.39 per cent, Frankfurt's DAX was off 0.57 per cent and the Paris CAC 40 was down 0.11 per cent.

"The markets are hedging their bets, they're getting large and liquid," said John Stephenson, portfolio manager at First Asset Funds Inc.

'They're sitting on the sidelines, not putting any money to work before this announcement.' John Stephenson, portfolio manager,First Asset Funds

"They're sitting on the sidelines, not putting any money to work before this announcement."

"The pattern has been, get your hopes up, then be disappointed by EU summits, and that pattern has been in place for a while," said Steve Van Order, fixed income strategist at Calvert Investment Management.

With S&P's growing warnings, it's not clear that EU leaders have until Christmas to avert a debt spiral.

That happens whenlenders demand higher interest rates from governments with growing odds of default.

That forces those countries to put aside an ever larger share of their budgets for interest. And thatresults inless for everything else, leaving countries the choice of trying to borrow even more to make up the differenceor cut services, which hurts their economies.

France and Germany have called on the other members torenegotiate the European Union's founding treatiesand allow a central European authority to enforce greater fiscal discipline.

But changing the treaty terms would open the way for a distraction from the central focus of resolving the crisis.

British Prime Minister David Cameron, for instance, said he would demand greater freedoms for London's sprawling financial industry as his price for supporting any new European Union treaty.

Britain fears treaty changes would force a greater transfer of power from London to Brussels and curb British influence in the EU.

Many analysts are less concerned about long-term measures such as fiscal discipline and are more interested in seeing firm commitments made now to have the European Central Bank or the IMF provide more financial aid to troubled eurozone members.

The ECB is widely expected to give European banks a boost on Thursday by making longer-term emergency loans available and reducing interest rates for the second month in a row.

The central banks new president, Mario Draghi, will hold a press conference after its policy statement is released Thursday, and his every word will be scrutinized and parsed by financial markets attempting to determine what further steps it may be ready to take, including whether that includes large-scale purchases of European government bonds.

U.S. takes role

The Americans are also playing a role in the negotiations.

U.S. Treasury Secretary Timothy Geithner continued darting across Europe on Wednesday, visiting five cities in two days, trying to spur the continent's leaders to act quickly and convincingly before the crisis undermines the global recovery.

"I am here in Europe to emphasize how important it is for the United States and the global economy as a whole that Germany and France succeed, alongside the other nations, in building a stronger Europe," he said in Berlin on Tuesday.

U.S. President Barack Obama has been pressing European leadersespecially Merkel and Sarkozyto come up with a solid plan.

"I'm spending an awful lot of time making transatlantic calls," Obama said at a fundraiser in New York last week.