Standard & Poor’s on Monday warned that it may strip the euro zone’s two biggest economies, Germany and France, of their top-notch AAA credit ratings as a result of the Continent’s economic crisis.
The agency also warned that the ratings of 13 other euro zone countries were vulnerable.Rumors of the report before the financial markets closed for the day led United States Treasuries to rally strongly, the euro to fall back and stocks on Wall Street to give up some of their gains for the day.
The report came at the beginning of an important week in Europe, with European Union leaders meeting in Brussels on Thursday and Friday to try to draw a line under the crisis.
But it was also likely to stir up further anger among some European politicians who have argued that previous credit downgrades of countries like Greece, Portugal, Spain and Italy have worsened the crisis.
Ahead of the summit meeting beginning on Friday, the leaders of France and Germany met in Paris on Monday, agreeing to propose changes to Europe’s underlying treaties to impose greater fiscal discipline on profligate nations’ budgets.
The warning from Standard & Poor’s chimes with the mood of urgency in Europe that time is running out to fix its problems.
Germany, in particular, is warning that a new system of monitoring and punishments for overspending countries must be put in place to stop a similar crisis from happening again.
In the United States, reports of the impending action affected Treasuries the most. After a morning sell-off, the government bonds rallied in the afternoon, “suggesting a flight to safety,” said Guy LeBas, an economist at Janney Montgomery and Scott. “It definitely had a sizeable effect.”
The stock market also gave up some of its gains for the day. The Dow Jones industrial average, up about 130 points in the early afternoon, ended up 78 points or about 0.7 percent on the day.
The euro reversed some of its gains.
Some Wall Street analysts viewed the announcement as a reminder to investors and political leaders in Europe about what was at stake this week.
"You could call this a nudge from behind," said Andrew Wilkinson, the chief economic strategist at Miller Tabak & Company in New York. "Yes, there’s every chance there could be downgrades, but investors will be very unfriendly to the euro zone in general if there is no improvement this week in terms of a plan.”
Last month, one of the other big rating agencies, Moody’s Investors Service, issued its own bleak report on Europe’s sovereign debt crisis.
It warned of rising prospects for multiple defaults by countries in the euro zone and credit rating downgrades of nations across Europe if leaders failed to resolve the spreading debt crisis.
Moody’s said that “the probability of multiple defaults by euro area countries is no longer negligible,” and that “a series of defaults would also increase the likelihood of one or more members not simply defaulting, but also leaving the euro area.”
In August, Standard & Poor’s shocked markets when it lowered its long-term rating of the United States to AA+ from AAA.
But the agencies also faced attacks that they missed the European crisis in the first place, overlooking signs of impending trouble that have now nearly brought Europe and the world economy to a standstill.
Moody’s lapses before last year helped embolden Greece to heap on billions in sovereign debt and encouraged investors to invest more heavily in its debt, critics say.
Now some of those buyers face 50 percent losses on the bonds — loans that carried the agencies’ stamp of approval but that Greece can no longer afford to pay off.
Had the rating agencies been more skeptical of euro zone countries’ borrowing beyond their means, critics say, that might have slowed the debt carousel for Greece and others.
Moody’s held its rating steady even after Greece in 2004 admitted lying about its deficits to join the countries using the euro in 2001.
Now, the ratings agencies are under fire from European regulators about whether their recent downgrades of Italy and Spain worsened an already tenuous situation.
This fall, the credit rating agencies downgraded the government debt of Spain and Italy, the first time in nearly two decades in the case of Italy.
And in November, Moody’s warned that the sustained rise in debt yields combined with weaker economic growth could harm the ratings outlook on France, the euro zone’s second-largest economy.
While some investors have begun to worry that France could lose its gold-plated AAA status, few believed Germany would as well.
But as the bigger countries are forced to pick up an even greater share of the bill, it puts their own fiscal situations at risk.
"We’ve recognized that for these stronger economies, taking on the burden of helping or supporting the weaker economies to allow them to deal with their debt burdens and to restructure themselves — taking on that burden, is going to be costly for them," said Jerry Webman, chief economist with Oppenheimer Funds.
Pointing to the recent rise in German bond yields, Mr. Webman said investors are pricing in slightly more risk, no matter what the eventual fate of the euro zone may be.
"Either Germany finds itself more on the hook for Ireland, Portugal and Greece’s problems or, if a deal doesn’t happen, that’s damaging for Germany’s export economy," said Mr. Webman
nytimes.com
The agency also warned that the ratings of 13 other euro zone countries were vulnerable.Rumors of the report before the financial markets closed for the day led United States Treasuries to rally strongly, the euro to fall back and stocks on Wall Street to give up some of their gains for the day.
The report came at the beginning of an important week in Europe, with European Union leaders meeting in Brussels on Thursday and Friday to try to draw a line under the crisis.
But it was also likely to stir up further anger among some European politicians who have argued that previous credit downgrades of countries like Greece, Portugal, Spain and Italy have worsened the crisis.
Ahead of the summit meeting beginning on Friday, the leaders of France and Germany met in Paris on Monday, agreeing to propose changes to Europe’s underlying treaties to impose greater fiscal discipline on profligate nations’ budgets.
The warning from Standard & Poor’s chimes with the mood of urgency in Europe that time is running out to fix its problems.
Germany, in particular, is warning that a new system of monitoring and punishments for overspending countries must be put in place to stop a similar crisis from happening again.
In the United States, reports of the impending action affected Treasuries the most. After a morning sell-off, the government bonds rallied in the afternoon, “suggesting a flight to safety,” said Guy LeBas, an economist at Janney Montgomery and Scott. “It definitely had a sizeable effect.”
The stock market also gave up some of its gains for the day. The Dow Jones industrial average, up about 130 points in the early afternoon, ended up 78 points or about 0.7 percent on the day.
The euro reversed some of its gains.
Some Wall Street analysts viewed the announcement as a reminder to investors and political leaders in Europe about what was at stake this week.
"You could call this a nudge from behind," said Andrew Wilkinson, the chief economic strategist at Miller Tabak & Company in New York. "Yes, there’s every chance there could be downgrades, but investors will be very unfriendly to the euro zone in general if there is no improvement this week in terms of a plan.”
Last month, one of the other big rating agencies, Moody’s Investors Service, issued its own bleak report on Europe’s sovereign debt crisis.
It warned of rising prospects for multiple defaults by countries in the euro zone and credit rating downgrades of nations across Europe if leaders failed to resolve the spreading debt crisis.
Moody’s said that “the probability of multiple defaults by euro area countries is no longer negligible,” and that “a series of defaults would also increase the likelihood of one or more members not simply defaulting, but also leaving the euro area.”
In August, Standard & Poor’s shocked markets when it lowered its long-term rating of the United States to AA+ from AAA.
But the agencies also faced attacks that they missed the European crisis in the first place, overlooking signs of impending trouble that have now nearly brought Europe and the world economy to a standstill.
Moody’s lapses before last year helped embolden Greece to heap on billions in sovereign debt and encouraged investors to invest more heavily in its debt, critics say.
Now some of those buyers face 50 percent losses on the bonds — loans that carried the agencies’ stamp of approval but that Greece can no longer afford to pay off.
Had the rating agencies been more skeptical of euro zone countries’ borrowing beyond their means, critics say, that might have slowed the debt carousel for Greece and others.
Moody’s held its rating steady even after Greece in 2004 admitted lying about its deficits to join the countries using the euro in 2001.
Now, the ratings agencies are under fire from European regulators about whether their recent downgrades of Italy and Spain worsened an already tenuous situation.
This fall, the credit rating agencies downgraded the government debt of Spain and Italy, the first time in nearly two decades in the case of Italy.
And in November, Moody’s warned that the sustained rise in debt yields combined with weaker economic growth could harm the ratings outlook on France, the euro zone’s second-largest economy.
While some investors have begun to worry that France could lose its gold-plated AAA status, few believed Germany would as well.
But as the bigger countries are forced to pick up an even greater share of the bill, it puts their own fiscal situations at risk.
"We’ve recognized that for these stronger economies, taking on the burden of helping or supporting the weaker economies to allow them to deal with their debt burdens and to restructure themselves — taking on that burden, is going to be costly for them," said Jerry Webman, chief economist with Oppenheimer Funds.
Pointing to the recent rise in German bond yields, Mr. Webman said investors are pricing in slightly more risk, no matter what the eventual fate of the euro zone may be.
"Either Germany finds itself more on the hook for Ireland, Portugal and Greece’s problems or, if a deal doesn’t happen, that’s damaging for Germany’s export economy," said Mr. Webman
nytimes.com
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