The ratings of 15 euro-zone nations were placed on credit watch negative by Standard & Poor’s Ratings Services, which cited tightening credit conditions and disagreements among European policy makers on how to tackle the region’s immediate and long-term economic challenges.
The decision to put the countries on negative credit watch–which signals there is a 50% chance of a downgrade within 90 days–would hit six countries with the rating firm’s highest, triple-A rating: Germany, France, the Netherlands, Austria, Finland and Luxembourg.
France and Germany, the euro zone’s two largest economies, said Monday they took note of the move by S&P to put the credit ratings of euro-area countries on review.
In a joint statement, the two nations’ governments said they “reaffirm that the proposals made jointly [on Monday] will reinforce the governance of the euro area in order to foster stability, competitiveness and growth.”
On Monday, French President Nicolas Sarkozy and German Chancellor Angela Merkel said they will use an EU summit on Thursday and Friday to propose enshrining fiscal discipline into EU treaties.
The statement from France and Germany on the ratings added that they were determined “to take all the necessary measures, in liaison with [their] partners and the European institutions to ensure the stability of the euro area.”
The shift by the ratings firm affected the long-term sovereign ratings of all members of the euro zone except Cyprus, which was already on credit watch negative, and Greece, whose ratings have already been cut to junk and weren’t affected by Monday’s move.
The ratings company, in announcing its move, said “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.”
The expected move comes ahead of this week’s European Union summit. On Friday, euro-zone officials are expected to lay out plans to enforce stricter budget rules across the currency bloc in an effort to keep the Continent’s turmoil from worsening.
The yields on bonds issued by financially stressed European governments such as Italy and Spain have soared in recent months amid questions about growth prospects, debt loads and budget deficits. Rising yields make it costlier for governments to borrow and can slow growth at a time when the region is already dealing with high unemployment and near recession conditions.
The meeting comes on the heels of a coordinated action by the world’s central banks to make dollars available to banks at a lower cost. The move, made last week, has helped lower bond yields in Europe by allaying fear that national governments won’t be able to fund themselves.
Over the course of the year, European officials have met repeatedly to address the debt crisis. Yet optimism that has followed news of apparent breakthroughs has repeatedly given way to further market unrest, as details fell short of what the market expected.
The S&P move follows an August decision by the ratings company to downgrade the U.S. debt rating to double-A-plus from triple-A after contentious debt-ceiling talks.
Current European regulation requires credit-rating firms to let issuers know of any rating action 12 hours before that change is reported to the broader market. European regulators last month proposed that rating firms notify issuers “a full working day” before publication of a rating action “to leave the rated entity sufficient time to verify the correctness of data underlying the rating.”
The rating firms have expressed concerns that 12 hours is already too generous and heightens the possibility that a government could leak an impending downgrade or outlook change.
David H. Levey, who was a sovereign-debt analyst at Moody’s Investors Service from 1985 until 2004, said rating firms typically used to notify countries of a downgrade or outlook change one to two hours ahead of time because of concerns about leaks to the media and the potential for insider trading by government officials. “The longer the period of pre-announcement, the greater are both of those risks,” he said.
Source:The Wall Street Journal
