Ratings firm Standard and Poor’s said Monday that all 17 euro zone countries, including Germany, France and four other top-tier economies, face potential ratings downgrades as a result of the long-running European debt crisis.
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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 coveted AAA ratings.
The ratings firm also warned nine other countries whose ratings have fallen below AAA that they could face further downgrades.
“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,” S&P said in a statement.
Greece, which is teetering on the verge of default, and Cypress are already being closely watched by S&P and were left off the list released Monday.
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, but still closed up 78.41 at 12097.83.
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, or in some cases two. The ratings firm said its reviews would be completed “as soon as possible,” likely within 90 days.
The news is significant because Germany is widely recognized as the healthiest economy in Europe and its health is key to any solution to debt woes that have threatened economies in Spain, Italy and Greece with collapse.
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 it is concerned that Europe’s debt problems are so severe that even the zone's strongest economies will be drawn into the crisis.
The ratings firm cited five reasons for issuing the warning: tightening credit conditions across the euro zone; “markedly higher risk premiums” on a growing number of euro zone countries, including some that are currently rated 'AAA’; continuing disagreements among European policy makers on how to fix the problem; high levels of government and household debt across large swaths of Europe; and the growing risk of another recession in Europe next year.
It was uncertain Monday whether the potential downgrades 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 critical summit meeting.
S&P said its review of euro zone nations will focus on the “political,” “external,” and “monetary” issues facing each of the countries under review.
The politics review will cover problems in the political sphere “that appear to us to be limiting the effectiveness of efforts to resolve the market confidence crisis,” S&P said. An analysis of “external liquidity” will review the borrowing requirements of both euro zone governments and banks. And a review of “monetary flexibility” will focus on European Central Bank policy settings “to address the economic and financial stresses the countries in the eurozone are increasingly facing.”
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 certainly not lost on European leaders.