Less than a month after the EU threatened a crackdown on ratings agencies, S&P blasted Brussels’ “defensive and piecemeal” management of the crisis, blaming the “open and prolonged dispute among European policymakers” for destroying investor confidence.
Those placed on “negative credit watch” include all of the currency union’s remaining triple-A rated sovereigns: Germany, France, Austria, Finland, the Netherlands and Luxembourg.
S&P cited rising “systemic stress” due to an “approaching recession”, a dysfunctional political process and a bank credit crunch, with the agency estimating that Eurozone banks will see €205bn (£131bn) of their debt mature in the first quarter of next year.
French banks are a particular worry, S&P said, highlighting that the value of their external debt is greater than France’s GDP. The agency said that the figures raise questions about the impact on Paris’ finances if its lenders require bailouts.
The only two Eurozone countries to escape the new downgrade threat were Cyprus, which is already on negative watch, and Greece, on the grounds that its debt is already junk.
Those that were affected now face a 50-50 chance of being downgraded in the next 90 days, although S&P said it would try to come to a conclusion sooner. The triple-A rated nations could see a one-notch downgrade and the others a two-notch fall.
The timing could hardly have been worse, coming after a show of unity from German Chancellor Angela Merkel and French President Nicolas Sarkozy sent investor sentiment soaring yesterday afternoon.
European stocks had risen, with the French CAC40 up 1.15 per cent, the FTSE 100 up 0.28 per cent and the German DAX up 0.42 per cent.
A range of austerity measures unveiled by Italian Prime Minister Mario Monti had also buoyed confidence in Rome, with its ten-year yields dropping 73 basis points to below six per cent.
But in markets that were still open, the trend reversed sharply after news of S&P’s move leaked out: the Dow fell over 100 points in response and the euro dropped versus the dollar.
The agency preemptively defended the timing of its move, implying that it would serve to pile pressure on Eurozone leaders to make substantive progress at their next summit on Thursday and Friday.
But its actions assume that the “reactive and insufficient policy responses to date” will continue, it said, setting the scene for “another, possibly steep, drop downwards” in investor confidence.
Some analysts had begun to raise questions after Merkozy’s joint press conference, in which they outlined plans to increase Brussels’ control over profligate states.
In particular, economists are doubtful that Germany and France will be able to persuade all the other Eurozone members to sign up to treaty changes.
S&P said that fiscal oversight will need to come alongside “a greater pooling of fiscal resources” in order to avoid a downgrade threat.
But that is likely to prove unpopular in Finland and Slovakia, both of which resisted passing the most recent package of changes to boost the euro bailout fund.
France and Italy will respectively see €126bn and €91.2bn of their debt mature in the next three months.