After the close in New York, S&P puts just about every euro nation--including Germany--on credit watch negative
12/05/2011 5:35 pm EST
This afternoon (New York time) the Financial Times reported that Standard & Poor’s would put the AAA-rated European countries on credit watch negative. Bloomberg, on the other hand, reported that Standard & Poor’s would put all 17 euro nations on credit watch negative. (Credit watch negative is a warning that an actual downgrade could be in the cards within the next 90 days.)
After the close of markets in New York today, Standard & Poor’s announced that it had put 15 European countries on credit watch negative. The group includes all of the EuroZone’s AAA-rated economies—France, Germany, the Netherlands, Finland, Austria, and Luxembourg—plus the countries already at the heart of the euro debt crisis—Ireland, Portugal, Spain, and Italy. Of the 17 EuroZone nations, only Cypress (already on credit watch negative) and Greece (how low can a rating go?) escaped.
Here’s the logic behind the credit watch negative rating straight from Standard & Poor’s statement this afternoon:
“Today's CreditWatch placements are 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.
We believe that these systemic stresses stem from five interrelated factors:
(1) Tightening credit conditions across the eurozone;
(2) Markedly higher risk premiums on a growing number of eurozone sovereigns, including some that are currently rated 'AAA';
(3) Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members;
(4) High levels of government and household indebtedness across a large area
of the eurozone; and
(5) The rising risk of economic recession in the eurozone as a whole in 2012. Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40% probability of a fall in output for the eurozone as a whole.”
It will be “interesting” (that is if you’re an observer from Mar who doesn’t have any money in the financial markets) to see how investors react to this move tomorrow. (By the way, “a fall in output” is a nice way of saying “recession.”
On the evidence of today’s retreat in U.S. stocks on the rumor, I don’t expect that investors will be amused. If the EuroZone’s AAA-rated countries were to lose that rating, it would be a huge blow to the European Financial Stability Facility. The EuroZone’s financial rescue mechanism depends on the AAA-ratings of France and Germany for its own AAA-rating. Without that backing, raising money for the facility in the bond market gets much more expensive—if it doesn’t become impossible. From this perspective, Standard & Poor’s action threatens to blow a hole in one of the few concrete mechanisms that the EuroZone countries have managed to put in place as a fix to the crisis.
On the other hand, you could certainly argue—and I would—that this puts the screws to Europe’s leaders. If they don’t come up with a plan to address at least some of S&P’s concerns by the conclusion of the Friday summit, nobody can argue that the consequences would be unexpected. S&P’s action should strengthen the hand of those EuroZone leaders who are arguing for concrete action rather than more vague promises of future action.
My best guess is that Asian markets will sell off on the news from S&P and that tomorrow European markets will follow but with less sense of panic than I expect to see in Asia.
The stakes for Thursday’s meeting of the European Central Bank and Friday’s meeting of European leaders just got even higher.
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