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Eurozone may face credit downgrade

Efforts to stabilise Europe's financial crisis have been thrown into disarray as the 17 countries that use the euro braced for a possible downgrade of their credit ratings.

The leaders of France and Germany sought to restore confidence in the troubled European currency during the day with a joint call for changes to the European Union treaty so that countries using the euro would face automatic penalties if budget deficits ran too high.

Stock prices rose and borrowing costs for European governments dropped sharply in response to the changes proposed by French president Nicolas Sarkozy and German Chancellor Angela Merkel.

They said their proposals would prevent the kind of out-of-control spending and borrowing that led to the debt crisis that is engulfing Europe and threatening the global financial system.

However sources said Standard & Poor's is examining the credit rating of all 17 eurozone countries for a possible downgrade as the continent's debt crisis lingers. Standard & Poor's later confirmed the threat to downgrade the credit rating of 15 eurozone countries, saying the worsening debt crisis is affecting the bloc's strongest economies.

The decision to put 15 eurozone countries, including AAA-rating nations such as Germany and Luxembourg, on watch for a possible downgrade piles pressure on eurozone leaders to find a solution to the currency union's debt troubles.

It comes ahead of a crucial summit of EU leaders later this week. If there is widespread support at the summit, it is assumed that would be an important first step in bringing an end to the crisis, which has dragged on for more than two years.

"Our wish is to go on a forced march toward re-establishing confidence in the eurozone," Mr Sarkozy said at a news conference in Paris, with Ms Merkel at his side. "We are conscious of the gravity of the situation and of the responsibility that rests on our shoulders."

Mr Sarkozy pledged to have a revised EU treaty ready for signing by March. It would then need to be ratified in each country, which could mean lengthy parliamentary debates or national referendums in some cases.

Mr Sarkozy said he and Ms Merkel would prefer that the treaty changes they are proposing be agreed by all 27 members of the EU, but he left the door open to an agreement only among the 17 euro countries and anyone else "who wants to join us".

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