The rating agency Standard and Poor’s (S & P) has downgraded Friday nine countries in the euro area, with France, Italy, Spain, Austria and Portugal on this list, and confirmed the ratings for seven other countries, among them Germany, the largest economy in the EU, Holland, Belgium and Ireland. Italy, Spain, Portugal and Cyprus have been marked down by two notches, while ratings of Austria, France, Malta, Slovakia and Slovenia were reduced by one step, it said in an S & P statement.
Ratings for Germany, Finland, Netherlands, Luxembourg, Belgium, Estonia and Ireland have been confirmed. The agency has waived the supervision with negative implications for all the 16 countries. France, the second largest economy in the euro area was downgraded by one step, from “AAA” to “AA +” and lost for the first time the maximum rating possible. For Italy and Spain, relegation was two steps from the “A” to “BBB +” and from “AA-” to “A”, respectively. Italy is the third largest economy in the euro area and Spain fourth.
Austria’s rating went down one step down from “AAA” to “AA +”. Portugal was downgraded from “BBB-” to “BB”, Cyprus from “BBB” to “BB+”, Malta from “A” to “A-“, Slovakia from “A +” to “A” and Slovenia from “AA-” to “A +”. Germany, Netherlands, Finland and Luxembourg have kept their “AAA” ratings, maximum possible, while Belgium was maintained at “AA”. Ireland’s rating was kept at ‘BBB +’, and that of Estonia at “AA-“.
“Decisions are motivated largely by S & P’s view that the initiatives taken by European leaders in recent weeks may be insufficient to resolve systemic problems in the euro area”, wrote S & P analysts. Pressure on the euro area include, according to S & P, tighter financing conditions, increasing the risk premium for a growing number of euro area countries, trying at the same time reduction of debt by governments and households in monetary union, damage of growth prospects and the open and prolonged dispute between the euro zone leaders on solving the problems.
The result of the meeting in early December and subsequent statements of political leaders led S & P to believe that the agreement reached does not have enough impact to fix the problems of the euro area. “In our opinion, the political agreement does not provide sufficient additional resources and operational flexibility to increase the strength of European financial rescue initiatives or provide enough support to euro area countries under high pressure from financial markets”, reads the release.
With the exception of Germany and Slovakia, which have stable outlook, all other 14 countries have a negative outlook. The negative outlook indicates a possibility of at least 33% rating to be revised down in 2012 or 2013. The agency placed under surveillance in December, for a possible downgrade, 15 eurozone countries. Of the 17 euro zone members, only Greece and Cyprus were not included in the warning in December.
Cyprus rating was not under surveillance in December as the country’s rating is already under evaluation at S & P. Greece also was not considered for demotion because the country is rated in “junk” category, at “CC”. Investors were anticipating a downgrade of euro area countries and quotations on exchanges have already taken into account, at least partially, the impact of such decisions. Besides the effect on borrowing costs of countries, sovereign ratings have an impact on ratings of other issuers in those countries, such as banks. A reduction in ratings of euro area countries can lead to demotions of other companies, thus indicating a higher risk to investors.
While some countries in the euro area still retains the highest ratings from Fitch and Moody’s, the benefit is more like it in image, because investors usually take into account the lowest rating from the three major credit rating agencies. Moody’s announced on December 12 that it will analyze the ratings of all countries in the European Union after European leaders have not taken sufficient measures to end the debt crisis, while Fitch analyzes revisions with negative outlook for several countries that don’t have the highest “AAA” rating.
Shortly after placing under surveillance in December the 15 countries, S & P announced that it considers, for possible downgrade, the “AAA” rating of the European Financial Stability Facility and the European Union. S & P assigns “AAA” rating to the European Union since 1976.
S & P downgraded in August the United States, for the first time in history, after disagreements between American politicians have threatened to push the country into default. U.S. rating was lowered one step from “AAA” to “AA +”. Demotion of the United States, the largest economy in the world, didn’t have the effect anticipated by analysts and U.S. borrowing costs have come down to new record lows. Because of the growing global uncertainties, U.S. debt is considered among the safest investments.