Eurozone Faces Unprecedented Mass Downgrade

By: EW News Desk Team   Date: 6 December 2011

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06 December 2011

International credit rating agency Standard & Poor’s have placed 15 out of the 17-member eurozone on its negative credit watch list, as growing "systemic stresses" in the region continue to “put downward pressure on the credit standing of the eurozone as a whole.”

Of the 17 countries forming the euro zone, only two countries were not included in S&P’s latest move: Cyprus, whose rating was already on the negative credit watch list, and Greece, which had a junk CC-rating.

See the Slide Show >>> The Government Debt of 12 Eurozone Nations

The other eurozone countries though face a possible downgrade within the next three months, with S&P warning that a review could come “as soon as possible”, particularly with the looming EU summit to occur this Friday.

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"I think it's (S&P) turning up the pressure on the EU but I don't think it's a surprise,” said Mogens Hauschild, Regional Director of Western Union Business Solutions in Vancouver British Columbia, to Reuters. “It’s very difficult. This situation is not going to go away. But they need to stem the bleeding. “

S&P’s announcement though came barely moments after French President Nicolas Sarkozy and German Chancellor Angela Merkel informed reporters of a Franco-German led initiative, which will be discussed on Friday, to enforce budget discipline across the 17-member zone through EU treaty changes.

Their plan includes automatic penalties for states that fail to keep deficits under control, as well as for the early launch of a permanent bailout fund for euro states in distress. According to French Finance Minister Francois Baroin, S&P’s statement may not have taken Sarkozy’s and Merkel's latest announcement into account.

Still, the EU Summit on Friday could be make-or-break for the eurozone countries, with S&P challenging the eurozone to come up with a concrete solution by then.

"We are of the view that the upcoming European summit ... provides an opportunity for policymakers to break the pattern of what we consider to have been defensive and piecemeal measures to date, overcome individual national interests and preferences, and advance a credible response to the crisis that would go far toward restoring investor confidence," S&P said of its decision to make the downgrade warning before the meetings.

Related: Forget Finance, Europe’s Next Crisis Will Be Political In Nature: George Friedman

Related: Europe’s Woes Stem From A Crisis Of Nationalism: George Friedman

Related: The Endgame For The Eurozone Has Begun: Nouriel Roubini

“The market is very quiet even after the S&P news. That's because they are set for the ECB and the EU meeting on Friday. The focus will be on the ECB Thursday to see if they'll do more toward being lender of last resort. And if Merkel and Sarkozy are going to make a new treaty, that could help, but it won't solve it all,” added Hauschild.

Countries at risk of having their rating cut by one notch include Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg. The rest of the eurozone, including France and Italy, could see downgrades of up to two notches.

The Government Debt of 12 Eurozone Nations
View the Slide Show

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