S&P warns euro nations of possible credit downgrade

 
Flags and a statue holding the euro sign The euro fell on news of the S&P announcement

Ratings agency Standard and Poor's has put almost all the eurozone including Germany and France on "credit watch" because of fears over the debt crisis.

S&P's move means six countries with top AAA ratings would have a 50% chance of seeing their ratings downgraded.

The news came as a surprise to investors and saw stocks fall back on early gains as the euro also fell.

France and Germany responded by saying proposals for a treaty change would reinforce governance of the eurozone.

They said their priority was to press ahead with proposals for reform, but the BBC's Chris Morris in Brussels says many details have not been revealed and other countries will reserve judgement till they have seen them.

The move by Standard and Poor's came after talks in Paris between French President Nicolas Sarkozy and German Chancellor Angela Merkel.

They said all 17 eurozone states should should face greater checks on their budgets and sanctions if they ran up deficits, and that a new treaty should be completed by March to ensure such a crisis never happened again.

But our correspondent says there will be widespread anger at the timing of the agency's decision, which raises the stakes another notch ahead of an EU summit on Friday that is being seen as crucial for the future of the single currency.

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S&P says it wants eurozone leaders to understand how much is at stake if this week's summit is another damp squib”

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Ahead of the summit, US Treasury Secretary Timothy Geithner is arriving in Europe to hold talks with top financial officials in several countries. On Tuesday, he will hold a meeting at the European Central Bank in Frankfurt before his talks with German Finance Minister Wolfgang Schauble.

'Taking note'

On Monday, S&P's announced that it had placed its "long-term sovereign ratings" on 15 eurozone nations on credit watch "with negative implications".

The ratings agency said the decision was prompted "by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole".

As well as Germany and France, Austria, the Netherlands, Finland and Luxembourg also currently have top AAA rating.

Five crucial days for the euro

  • Monday: Nicolas Sarkozy and Angela Merkel propose tighter eurozone controls
  • Italian PM Mario Monti seeks parliamentary approval for his austerity package
  • Ireland's government unveils details of its proposed austerity budget
  • Tuesday: US Treasury Secretary Timothy Geithner arrives in Germany before travelling to France and Italy for talks with euro leaders
  • Wednesday: The talking continues as many EU leaders gather in Marseilles for a European People's Party congress
  • Thursday: ECB's monthly policy meeting could produce new measures
  • Thursday and Friday: Crucial EU summit in Brussels to consider Sarkozy-Merkel plan

S&P's announcement means that there is a one in two chance that those countries would see their credit rating fall within 90 days.

Analysts also say S&P's move reflects uncertainty about what would happen were a larger eurozone country - such as Italy - to default in future.

The agency's decision is uncontroversial, says the BBC's Robert Peston, because eurozone banks have been struggling to borrow, a number of eurozone economies are buckling under the burden of big government and household debts, and there is a significant risk of recession.

Mr Sarkozy and Mrs Merkel said they would "take note" of S&P's warning.

French Finance Minister Francois Beroin later said that - for its part - Paris did not plan to expand the austerity measures it had already announced.

The only two countries not put on credit watch on Monday were Cyprus, which is already under review, and Greece, whose rating has already been severely downgraded.

Early reports of the move had an impact on the financial markets.

The benchmark Dow Jones index closed up 78.4 points having lost ground from far stronger gains earlier in the day.

The euro fell 0.5% against the dollar to $1.338.

Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating
The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.

"This is very disappointing," said David Kohl, chief economist at Julius Baer in Germany.

He said investors wanted to know that private lenders would be paid before other debts were serviced.

"Financial markets are questioning where is the priority for government debt," he added.

However, other economists said the move was expected.

"From my perspective this was a long time coming, given all the issues and given the fact that they've made very little headway on the crisis," said Jacob Oubina, senior US economist at RBC capital markets.

 

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  • rate this
    0

    Comment number 141.

    Once again the rating agencies perform their usual function of downgrading only after the deterioration has become blindingly obvious to all. This is their function. When they attempted to predict events by using mathematical models to assign spurious ratings to a raft of substandard products invented by investment bankers, they precipitated the financial crash.And got off scot-free!!!

  • rate this
    0

    Comment number 140.

    Rating agencies rate. If they rate you down for a good reason, you might not like it, but claiming it is a conspiracy is just plain ignorant. Provide some clear evidence that the decision makers in these firms directly benefit from rating you down. All they do is give their opinion anyway, if the markets ignore them, they become irrelevant. But the markets believe them to be credible, not perfect.

  • rate this
    +1

    Comment number 138.

    Yes we all know that rating agencies have questionable motivations. However what is this investors are surprised by downgrade of the EU? Absolute rubbish. I warned my clients months ago it might happen. Tthe strong economies like Germany have been trading on the back of the weak euro due to the weak economies. The strong economies are far from perfect but the data hide that fact.

  • rate this
    -1

    Comment number 123.

    No good will come of any of this. The announcement of a pact between the big two, Germany and France, is merely a desperate act of a dying ideology, which will most likely plunge the whole of Europe and possibly the world in to the worst recession ever known. The EU was never, and will not ever be a good idea. Simply being able to co-exist is the limit of any alliance between so many countries

  • Comment number 38.

    All this user's posts have been removed.Why?

 

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