Ahead of a planned summit of European Union leaders, the credit rating agency Standard & Poor’s has put all 17 Euro nations on review for a credit downgrade, which means France and Germany could lose the pristine AAA ratings they presently enjoy, Bloomberg News is reporting.
The euro area’s six AAA rated countries are among the nations to be placed on a negative outlook pending the result of a summit of European Union leaders on Dec. 9, the people said today on condition of anonymity because the decision has yet to be announced. The euro reversed its gains and U.S. Treasuries rose after the Financial Times reported earlier that the credit-ranking firm planned to reduce six AAA outlooks, without citing the source of the information. John Piecuch, a spokesman for S&P in New York, had no comment.
The downgrade warnings come as German Chancellor Angela Merkeland French President Nicolas Sarkozy push for a rewrite of the EU’s governing rules to tighten economic cooperation in a demonstration of unity on ending the debt crisis. With the fate of the currency shared by the 17 euro countries at risk, Merkel and Sarkozy presented a common platform for a Dec. 8-9 summit of EU leaders in Brussels that aims to halt the crisis now in its third year.
“Negative news is going to continue to spur rallies in the Treasury markets, at least until the ECB steps in to end this mess once and for all,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “S&P can serve to spook the markets, but I don’t think we’ll see any fresh policy action based solely on a ratings agency’s opinion.”
Frankly, as was the case this summer when S&P put the United States on downgrade review (prior to actually downgrading the nation), the S&P rating of these Euro nations matters far less than the actual fiscal state of affairs. The European debt crisis is nothing new — and, as with the United States’s debt crisis, the solutions are obvious, but difficult. What’s called for is a wholesale reform of the various member nations’ entitlement states.