S&P Issues Downgrade Warning For EU, Just About All of It

Despite image problems from shaky predications in the run-up to the recession, perceived conflicts of interest and a U.S. rating downgrade widely regarded as premature if not unnecessary, Standard & Poor’s has continued to not shy away from controversy with its ratings moves and warnings. But perhaps its most incendiary moment came this week when it put 15 European Union members on blast.

Just as markets were starting to have faith in the German- and French-led measure to clean up the EU’s ongoing debt and monetary problems, S&P swooped in to undue all of that positive by putting the long-term sovereign credit ratings on its negative watch list. Among those receiving the dubious distinction were Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands. The following nations were noted as negative both in the long and short term: Estonia, Ireland, Italy, Malta, Portugal, Slovak Republic, Slovenia and Spain. S&P’s now maligned release explaining its position included the following:

“Today's CreditWatch placements are prompted by our belief that 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. We believe that these systemic stresses stem from five interrelated factors:
  1. Tightening credit conditions across the euro zone;
  2. Markedly higher risk premiums on a growing number of euro zone 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 euro zone members;
  4. High levels of government and household indebtedness across a large area of the euro zone; and
  5. The rising risk of economic recession in the euro zone 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 euro zone as a whole.”

S&P noted that it’s waiting to make any decisions on rating moves until after the Dec. 8-9 EU Summit, but intimate some downgrades could occur very soon after. Stay tuned…

Brian Shappell, NACM staff writer

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