S&P downgrades nine eurozone countries; Austria loses AAA

Standard & Poor’s has downgraded the credit ratings of a raft of eurozone nations including Italy, Spain and Portugal as well as stripping France and Austria of their AAA status.

S&P has cut Italy by two notches, from A to BBB+, and placed it on a negative outlook, while Spain is downgraded by two notches from AA- to A. Slovakia and Slovenia have suffered cuts of one notch.

The ratings agency has also downgraded Portugal, Malta, and Cyprus to junk status, but has affirmed long-term ratings on Belgium, Estonia and Ireland.

S&P’s latest action has left just four European nations as members of the AAA-club.These are Germany, which had its stable outlook affirmed, Luxembourg, the Netherlands, and Finland.

With the downgrade of Austria, Germany is now the sole AAA-rated nation supporting the European Financial Stability Facility, itself also rated AAA.

Although Finland retains its AAA rating, the agency has placed it on a negative outlook, suggesting a future cut could be on the cards.

Of the 16 sovereigns S&P reviewed, nine has seen their long-term ratings lowered and seven have been affirmed. All but two of the 16 countries are on a negative outlook, S&P said.

The ratings agency said in a statement: “In our view, the policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone.”

Where the outlooks on long-term ratings are negative, there is at least a one-in-three chance the rating will be lowered in 2012 or 2013, the agency added.

Explaining the reason for the downgrades, S&P pointed to tightening credit conditions in the EMU; an increase in risk premiums for a widening group of eurozone issuers; attempts to deleverage; weakening growth and “an open and prolonged dispute among European policymakers over the proper approach to address challenges”.

Chris Bowie, manager of the £245m Ignis Corporate Bond fund, said the downgrades could act as a catalyst for more serious developments in the eurozone.

“French bond yields will certainly rise from levels seen today of 3% towards 7%,” he said. “It could be at 5.5% or 6% but it will be the one thing that forces the ultimate resolution to the crisis – either the euro breaks up or the ECB decides the inflation target is less important than holding the eurozone together and launches QE.”

S&P had warned in December it was reviewing the credit ratings of 15 of the 17 eurozone members, including Germany and France, pending the outcome of the EU summit in Brussels on 8-9 December.

The ratings agency said it hoped to complete the review “as soon as possible” after the summit, pointing to a rise in systemic stresses in the eurozone.

The ECB’s 3-year long-term refinancing operation had appeared to ease some of those stresses in the meantime, as optimism grew.

Fitch said earlier this week it would cut its own AAA-rating for France if the country does not take action on its budget deficit by the end of 2013.

Last month Christian Noyer, governor of the Bank of France, said ratings agencies should downgrade Britain, not France, on account of the more serious problems affecting the British economy.

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