Standard and Poor's 311 R.
(photo credit: REUTERS/Brendan McDermid)
NEW YORK - Standard & Poor's on Monday warned it may carry out an unprecedented mass downgrade on the credit ratings of euro zone countries if EU leaders fail to reach an agreement on how to solve the region's debt crisis in a summit later this week.
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S&P placed the ratings of 15 euro zone countries on credit watch negative - including those of top-rated Germany and France, the region's two biggest economies - and said "systemic stresses" are building up as credit conditions tighten in the 17-nation region.
While a credit watch negative typically signals a possible downgrade in no more than three months, S&P said it expects to conclude its review "as soon as possible" following a crucial summit of EU leaders on Friday.
Investors hope to see a comprehensive crisis response from policy makers, including the European Central Bank, at the EU summit.
"Systemic stresses in the euro zone have risen in recent weeks to the
extent that they now put downward pressure on the credit standing of the
euro zone as a whole," S&P said in a statement.
The higher interest rates that euro governments have been forced to pay
to sell sovereign debt as a result of greater perceptions of risk and a
rising chance of economic recession in the region next year are also
weighing on the ratings, S&P said.
If a downgrade does materialize, countries such as Germany, Austria,
Belgium, Finland, the Netherlands and Luxembourg would likely see
ratings cuts of only one notch. The other nine countries could suffer
downgrades of up to two notches, S&P said.
Of the other two members of the euro zone, S&P already has Cyprus on
credit watch negative, while Greece is rated CC, which already denotes
high possibility of default in the near term.EU leaders respond to S&P warning, promise action
French President Nicolas Sarkozy and German Chancellor Angela Merkel
responded to the S&P warning by saying they were united in their
determination to do everything necessary to secure the stability of the
However, France's finance minister, Francois Baroin, ruled out a new
round of austerity measures, and said S&P's move had not taken into
account a Franco-German plan to handle the crisis
S&P's warning on Germany, whose sovereign debt is considered a
European safe-haven, caught some investors off guard, although a weak
sale of German benchmark bonds in late November had sparked fears of a
spread of the debt crisis.
"Germany might be a bit of a surprise because it has a sterling credit
rating. But one things Germany is worried about is whether, if they
share the financial burdens of some of their financial partners, their
own credit standing will suffer," said Cary Leahey, senior economist at
Decision Economics in New York.
Other investors saw S&P's warning on the euro zone consistent with
its decision to strip the United States from its AAA rating in August.
"It would bring the top six (euro zone countries) in line with the
United States," said Dan Fuss, vice chairman of Loomis Sayles, which has
more than $160 billion in assets under management. "When you look at
the underlying factors here, are these really better credits than the
US? No. Not by a long shot."
S&P said its analysis will focus on the political dynamics - in
specific countries and in the euro zone as a whole - that "appear to be
limiting the effectiveness of efforts to resolve the market confidence
With many investors demanding a larger role for the European Central
Bank in the solution of the crisis, S&P will also review the ECB's
monetary flexibility "to address the economic and financial stresses the
countries in the euro zone are increasingly facing."Markets cool following S&P warning
News of S&P's move had leaked to the press in the afternoon, causing
US stocks to trim gains. US stock index futures slipped further after
the announcement, which was made after US markets closed.
The euro, which had already erased gains against the dollar after news
of the S&P warning had leaked, slipped further after the
But hopes that EU leaders will come up with a comprehensive plan to tackle the crisis still supported market sentiment.
"The market is very quiet even after the S&P news," said Mogens
Hauschildt, regional director at Western Union Business Solutions in
Vancouver, British Columbia. "That's because they are set for the ECB
and the EU meeting on Friday."
The other two major ratings agencies, Moody's and Fitch, have already
said they could soon review the rating of core euro zone countries, but
they still maintain a stable outlook on top-rated euro zone countries.