Ratings firm Standard and Poor’s has warned Germany and five other top-tier European economies that the long-running euro zone debt crisis could cost them their coveted AAA ratings.
The news, leaked earlier Monday, hit stock markets hard, taking the steam out of a broad rally. The Dow Jones Industrial average fell 100 points off session highs after news of the potential European downgrade became public.
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S&P said Germany, France, the Netherlands, Austria, Finland, and Luxembourg are being placed on “creditwatch negative,” which means there’s a 50/50 chance they could be stripped of their AAA ratings. The ratings firm also warned nine other countries whose ratings are below AAA that they could face further downgrades.
Two other countries in the 17-member euro zone -- Cypress and Greece -- are already being watched by S&P and so not included on Monday's warning list.
The new status means S&P plans to review each of the countries to determine whether they still warrant their current rating. If not, their ratings could be lowered a notch.
The news is significant because Germany is widely recognized as the healthiest economy in Europe and key to any solution to debt woes that have put weaker economies in Spain, Italy and Greece on the verge of default.
France has been threatened with a downgrade for weeks due to its exposure to bad debt in those faltering economies. But the threat to Germany's rating came as a surprise.
S&P said in a statement that it is concerned that Europe’s debt problems are so severe that even the strongest economies in the 17-member euro zone can’t remain unaffected.
It was uncertain Monday whether the potential downgrade would have any impact on meetings this week between European leaders seeking a uniform solution to problem that has roiled global markets for two years. U.S. Treasury Secretary Timothy Geithner is flying to Europe to participate.
A sort of deadline has been imposed for Friday, when many of Europe’s top fiscal leaders will gather in Brussels for a summit meeting.
In August, S&P downgraded the U.S. rating, fulfilling a threat to do so if U.S. policy makers failed to agree on a viable, long-term solution to the escalating U.S. budget deficit. The downgrade ushered in weeks of volatility in global markets, a situation not lost on European leaders.