Credit rating agency Standard & Poor's said today that current proposals to reform the European Stability and Growth Pact (SGP) could eventually lead to weaker sovereign ratings for some euro zone members.
The proposals carry significant risks and could disrupt fiscal consolidation in the region, the rating agency said.
"Most of the proposals tabled to replace or adapt the SGP sacrifice its virtues of simplicity and transparency to a degree that could undermine progress in fiscal consolidation," Standard & Poor's credit analyst Mr Moritz Kraemer said in a statement.
"The SGP's sanctions mechanism is currently undergoing its first real test; in such circumstances, changing the rules of the game is likely to weaken the credibility and reliability of any future fiscal rules."
Germany, Europe's largest economy, is set to breach the pact's three per cent budget deficit limit for a second straight year due to weak growth and lower tax revenues.
European economic affairs commissioner Mr Pedro Solbes said last week the three per cent limit on budget deficits should not be interpreted as a "straitjacket" that prevents governments undertaking reforms.
S&P said loosening the rules set out in the pact could be risky, as increased fiscal tolerance could be used as a pretext to put off politically contentious, but much needed, structural reforms.
"Weakening public finances across Europe have triggered an intense debate about the adequacy of the rules set forth in the SGP. The report argues the reform proposals that are being debated would replace the current rules with more opaque ones," S&P said in a statement referring to its own report on the matter.