Sept. 24 (Bloomberg) -- Standard & Poor's said it may downgrade the credit ratings of Germany and Italy, two of Europe's largest economies, unless their governments rein in spending and cut debt.

Germany risks losing its triple-A credit rating in 18 months unless it curbs budget spending and reduces debt, said Konrad Reuss, managing director of sovereign ratings at Standard & Poor's. Italy's AA-minus rating is also at risk unless the government of Silvio Berlusconi goes ahead with plans to cut spending, Reuss said.

Germany and Italy, the first- and third-largest economies on the 12-nation euro region, are struggling to contain spending amid an economic slowdown. Inconclusive elections in Germany and the resignation of Italy's finance minister this week left both countries in a state of political uncertainty, which may delay measures needed to spur economic growth.

If Germany does not take measures to correct its economic and budget problems in the next 12 to 18 months, ``then the question will certainly be there: negative outlook or even a downgrade,'' Reuss said. In Italy, any softening of the budget-reducing measures planned by departed finance minister Domenico Siniscalco ``would be very negative for the rating.''

The failure of Chancellor Gerhard Schroeder or his challenger Angela Merkel to win clear mandates in the Sept. 18 general election resulted in a political stalemate that companies fear may stall economic reforms. Germans may not know for weeks who will head their next government after both Merkel and Schroeder both declared the right to rule the nation.

`Catastrophe'

The result ``is a catastrophe for Germany,'' Eckhard Spoerr, chief executive of German Internet provider Freenet.de AG, said Sept. 19. ``It's now completely unclear who will govern the country. I'm afraid we will see a slowdown in urgently required reforms because the new government will have to make too many compromises.''

S&P said after the election that Germany must curb its deficit spending and reform its social security systems to avoid putting its credit rating at risk.

``For us it's important that the next government undertakes decisive budget and reform measures, so that we see a change in the trend,'' said Reuss, who was in Washington to attend International Monetary Fund and World Bank meetings. If Germany ends up with a coalition government ``that isn't very strong, stable or lasting,'' this would be ``another negative.''

In Italy, ``the question is now what policy direction will Berlusconi go in'' following Siniscalco's resignation, Reuss said.

Siniscalco Departs

Siniscalco stepped down as finance minister Sept. 22 after failing to win the resignation of Bank of Italy Governor Antonio Fazio and as allies in Berlusconi's four-way coalition denounced his 2006 budget plan. Giulio Tremonti took over as finance minister later the same day.

S&P lowered Italy's credit rating 14 months ago, making it the first cut for a European Union nation since the euro's debut in 1999. S&P reduced the outlook to negative from stable on Italy's rating on Aug. 8 citing slow growth and political instability.

``The problems in Italy are clear: a very high debt burden of over 100 percent of GDP, and a deficit in the region of 4-5 percent of GDP,'' Reuss said. ``If there are no decisive measures in the 2006 budget, we expect the deficit to climb to 5-6 percent of GDP.''

Siniscalco planned 11.5 billion euros ($13.8 billion) of measures to reduce Italy's deficit, which the government predicts will exceed the EU's 3 percent of GDP limit for a fourth year in 2006. Germany has breached that limit for three years running and is forecast by the IMF to do so again this year and next.

Borrowing Costs

German public debt may reach 67.6 percent of gross domestic product this year, the most among nations with top triple-A rating, S&P says. Italy's debt stood at 106.6 percent of GDP last year, the second highest in the EU after Greece.

A credit rating downgrade may make it more expensive for Germany and Italy to service their debts, said Reuss.

Italy's economy, which emerged from a recession in the second quarter, is forecast by the IMF to stagnate this year and expand 1.4 percent next year. The Washington-based fund forecasts growth of just 0.8 percent in Germany this year and 1.2 percent in 2006.

Politicians including Berlusconi and German Economy and Labor Minister Wolfgang Clement have called on the European Central Bank to reduce interest rates to help revive growth. The ECB, which has held its benchmark rate at a six-decade low of 2 percent for more than two years, says structural rigidities such as over-regulated labor markets are to blame for anemic growth.

``I don't believe it's monetary policy that will bring Europe forward, it's structural reform,'' Bundesbank President and ECB council member Axel Weber said in Washington Sept. 23.

Reuss agreed. ``We have very weak growth in Europe, in the main European countries. These are mostly structural problems and in our opinion a rate cut wouldn't be a solution.'' With inflation pressures building due to record oil prices ``it's probably the wrong time for a rate cut in the euro area.''

To contact the reporter on this story: Matthew Brockett in Washington at mbrockett1@bloomberg.net.

Last Updated: September 24, 2005 19:23 EDT