S&P Cuts the Ratings of 9 Major Euro-Zone Countries

Just five months after Standard & Poors, the American based ratings agency,  downgraded the U.S, Europe has joined its ranks. A Friday 13^th that shall truly be remembered after S&P cut the ratings of nine major European countries (France, Austria, Italy, Spain, Portugal, Cyprus, Malta, Slovenia and Slovakia)

France, the Euro-Zone’s second largest economy after Germany has lost its coveted AAA status. The ratings arrive as the on-going European crises continues with little or no end in sight.

Portugal whose rating was also cut is now “junk status” according a CNBC report. Italy is another country that had its rating cut and is now bordering Kazakhstan at the level of financial credibility.

This unprecedented event further deepens the unfolding crises in Europe which initially saw U.S markets drop amid rumours of the possible downgrades.

Germany, however, escaped unscathed still standing strong as the leading European Economy.

The downgrades by S&P raise many questions, in particular its effects on the rescue fund set up to bailout struggling Euro-Zone members. The European Financial Stability Facility (EFSF) could also be downgraded, said Standard and Poor’s.

The EFSF can only be backed by AAA rated countries and France being the funds 2^nd biggest guarantor, creates fears of the ability of the fund to deliver effective counter measures to the sovereign debt crises.

S&P released the rate cuts as talks between Greece and its creditors broke down over debt swap crucial to avoid a default. Greece’s dire situation is causing massive stress to markets as Greece fast approaches March when approximately €14.4 billion of its debt is due to be redeemed.

With more than half of the Euro-Zone members downgraded, and the remainder countries on a “negative outlook”, investors believe that future downgrades are inevitable.

Germany, whose bonds have recently been sought as a safe bet for investment tried to play down the news. German Finance Minister Wolfgang Schaeable was quoted in CNBC report as saying “ In the past months, we’ve come to agree that the ratings agencies judgements should not be overvalued”.

Francois Baroin – the French Finance Minister also made an attempt to shrug the news saying “ This is not a catastrophe. It’s an excellent rating. But not good news” according to France2 television and CNBC.

The re-election of Sarkozy will be difficult as he fights strong opposition on his policies for the French economy. Sarkozy will be remembered as the man who downgraded France, something Sarkozy will have to work very hard to win back voters.

The number of triple A rated entities in the world is shrinking rapidly. French as well as other European bond yields will surely suffer. To what extend they will suffer is speculative at present.  Investors seeking risk free returns in AAA investments have limited choices left brining the Euro currency’s stability into serious question.

Will the rating cuts affect European markets?

S&P warned of a possible rate cut in early December 2011 so the markets anticipated and priced in this move. The markets love transparency, clarity and certainty. Most sophisticated investors were prepared for this decision and as a result markets have done the opposite and rallied slightly. If the S&P warning was not issued in December, the markets could have been down between 3-5% following the release of this news.

2012 has started off on very negative footing which could be setting the trend for the remainder of the year. If the U.S downgrade in Aug 2011 is anything to go by, the European downgrades will most likely be a non-event resulting in markets chopping around at its current upper level trading ranges.

The more decisive factor on deciding the future direction of the European economy will be the outcome of the Greek debt deal negotiations. A positive result of these negotiations is critical to stabilising the Euro-Zone and restoring confidence in the single currency area.

Sources/References:

http://www.cnbc.com/id/45989399/