S&P warns euro nations of possible credit downgrade
Category: Global Market
December 5, 2011
Ratings agency Standard and Poor's has put almost the entire eurozone, including Germany and France, on "credit watch" due to fears over the impact of 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 say a new EU treaty is needed to tackle the crisis.
The proposal 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 run up deficits, and that a new treaty should be completed by March to ensure such a crisis never happened again.
The Paris talks come ahead of an EU summit on Friday that is being seen as crucial for the future of the single currency.
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.
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.
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.
But the timing is controversial, says our correspondent, coming just as France and Germany reached an agreement intended to subject all eurozone countries to stricter disciplines on what they borrow - and only days before a European Union summit that is intended to come up with a proper solution to the eurozone's crisis.
Mr Sarkozy and Mrs Merkel said they would "take note" of the the 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 has 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.
"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 are 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.