Debt Crisis: S&P Downgrades 9 Eurozone Countries

NEW YORK | Saturday, January 14th, 2012 3:47am EDT

Standard&Poor’s, bond rating agency, downgraded nine eurozone countries on Black Friday, marking a deterioration in confidence in the troubled eurozone.

Nine Eurozone Countries Downgraded 011

Among the downgraded Eurozone countries are France, Austria, Italy, Spain, Portugal, Cyprus, Malta, Slovenia and Slovakia. Photo: weekendpower/Flickr

According to the Huff Post, S&P replaced France and Austria from their gold AAA positions, putting them to AA+, and downgraded Italy and Spain two notches to BBB+ and A.

It also downgraded Portugal and Cyprus to non-investment grade ratings: BB and BB+ respectively. Slovenia was downgraded by the agency to A+ from AA-, Slovakia was downgraded to A from A+ and Malta was downgraded to A- from A.

“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the Eurozone,” S&P representative explained in a statement on Friday.

In a potentially predictable setback, negotiations on a debt swap by private creditors seem to be crucial to avert a Greek default that would affect Europe and the world economy broke up without agreement in Athens, the Telegraph reports.

Maurice Obstfeld, international economics professor at the University of California at Berkeley, said that all the downgrades will worsen the European debt crisis because it will become more expensive for eurozone countries to borrow.

He added that if eurozone countries do not print their own money, they will have a more serious risk of defaulting on their debts.

According to the professor, the intensification of the crisis in Europe will hurt American exports and will probably cause the possibility of further spreading of financial crisis to the United States.

If France and Italycome under more funding pressure, ‘the problems are very dire indeed,’ Obstfeld said.

Besides, eurozone countries being cut off from market funding may suffer from a prolonged recession, said Jonathan Lemco, principal and senior analyst at the investment company Vanguard.

“In the absence of clarity, why get involved?” Lemco said. He added plenty of safer government debt is being issued elsewhere, and as long as the European Central Bank does not provide backstop funding for governments and economic growth does not appear likely, investors will continue to avoid eurozone countries.

In case if Greece doesn’t manage to persuade banks and insurers to accept voluntary losses on their bond holdings, one more international rescue plan for the euro zone’s most heavily financially troubled state will unravel, raising the prospect of bankruptcy in late March, when redeemed 14.4 billion euros in maturing debt.

When speaking about the positive sides of the downgrades, Nicholas Economides, economics professor at New York University’s Stern School of Business, suggested that S&P is issuing credit ratings that are “more reflective of reality.” He supposed that the move will make European politicians to do their best to avoid a financial crisis potentially worse than the one in 2008.

“This is good for the European Union, and it is also good for the rest of the world,” Economides said. “The United States would like the Europeans to take more seriously their own crisis and deal with it.”

The Reuters says, that the agency put 14 euro-zone states on negative outlook for a possible downgrade. The list of nominees includes France, Austria, and still triple-A-rated Finland, the Netherlands and Luxembourg.

However, Germany was the only country holding with its triple-A rating and a stable outlook.

French Finance Minister Francois Baroin, speaking after an emergency meeting with President Nicolas Sarkozy, said that France was downgraded to AA+ for the first time since 1975.

“This is not a catastrophe. It’s an excellent rating. But it’s not good news,” Baroin said, adding that the government would not respond with further austerity measures.

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