December 6, 2011

S&P Warns Eurozone of Downgrades

Timing questioned by bondholders as scheduled summit approaches

Standard & Poor’s warned 15 eurozone nations, including several top-rated ones, that they might be subject to downgrades if a planned summit meeting of eurozone leaders fails to come up with a satisfactory course of action to resolve the bloc’s debt crisis. European Union leaders are scheduled to meet Thursday and Friday to discuss the crisis and strategies to contain it.

The initial report came before the closing bell on Wall Street and sent stocks down from earlier highs. When it was confirmed after the close, Bloomberg reported that bondholders and analysts were critical of the action and its timing. Anthony Valeri, a market strategist with LPL Financial in San Diego, was quoted saying, “S&P should back off. It complicates the job of the EU leaders to resolve the debt problem.”

European Central Bank headquarters (AP photo)The ratings agency warned that top-rated countries including Austria, Belgium, Finland, Germany, the Netherlands and Luxembourg could be in for single-notch downgrades, with France and the others in line for a probably two-notch drop if the summit does not produce a solution that meets S&P’s criteria. In a statement, S&P said in part that “continuing disagreements among European policy makers on how to tackle” the ongoing debt crisis are putting the countries’ financial stability in danger.

The agency’s report said, “The upcoming European summit provides an opportunity for policy makers to break the pattern of what we consider to have been defensive and piecemeal measures to date, overcome individual national interests and preferences, and advance a credible response to the crisis that would go far towards restoring investor confidence.”

European Central Bank Governing Council member Ewald Nowotny of Austria was critical of S&P’s tying the warning to the summit’s outcome. He was quoted saying that the move “highlights the problem that rating agencies increasingly are assuming a political role,” adding, “There is no doubt that rating agencies have an economically important role to play, but the way in which this is happening at the moment is increasingly problematic as it creates pro-cyclical effects; that means effects that make the crises worse.”

S&P, for its part, would only say in a statement that it had decided to review ratings prior to the summit because crisis risks have “risen markedly … Policy makers appear to have acted only in response to mounting market pressures.”

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