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Saturday, 14 January 2012

Standard & Poor's negatively adjusts ratings of nine Euro-zone countries. France and Austria lose their AAA-rating

This evening, after the New York stock exchange closed, Standard and Poor´s presented its rating adjustments for the countries in the Euro-zone. This was an expected move as all countries had been put on Creditwatch negative at 5 December 2011.

Maybe the biggest surprise was that Germany maintained its AAA-rating with an outlook stable. Although the AAA-rating was no surprise, the stable outlook was. Only two countries have a stable outlook for the coming years: Germany and Slovakia, of which Slovakia was downgraded one notch.

Two countries lost their treasured AAA-rating: Austria and France. Austria lost it probably due to its heavy involvement in Hungarian sovereigns, while France had to pay the price for the problems with the French banking industry. The three French system banks (G-SIFI) BNP Paribas, Crédit Agricole and Dexia are all three in deep financial trouble. Therefore S&P´s downgrade of France was expected by the market.

Here are the pertinent snips from the Standard and Poor's press release
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.

We are lowering our long-term ratings on nine eurozone sovereigns and affirming the ratings on seven.

We have lowered the long-term ratings on Cyprus, Italy, Portugal, and Spain by two notches; lowered the long-term ratings on Austria, France, Malta, Slovakia, and Slovenia, by one notch; and affirmed the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands.

The outlooks on the long-term ratings on Austria, Belgium, Cyprus, Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, and Spain are negative.

The outlooks on the long-term ratings on Germany and Slovakia are stable.

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. In our view, these stresses include: (1) tightening credit conditions, (2) an increase in risk premiums for a widening group of eurozone issuers, (3) a simultaneous attempt to delever by governments and households, (4) weakening economic growth prospects, and (5) an open and prolonged dispute among European policymakers over the proper approach to address challenges.

The outcomes from the EU summit on Dec. 9, 2011, and subsequent statements from policymakers, lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone's financial problems.

We also believe that the agreement is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone's core and the so-called "periphery". As such, we believe that a  reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.

We believe that the main downside risks that could affect eurozone sovereigns to various degrees are related to the possibility of further  significant fiscal deterioration as a consequence of a more recessionary macroeconomic environment and/or vulnerabilities to further intensification and broadening of risk aversion among investors, jeopardizing funding access at sustainable rates.

Here is an overview of the rating changes ( I don´t take any responsibility for typing errors, by the way – EL).

Overview new and old ratings after S&P ratings adjustment
All data courtesy of:
Click to enlarge
I can´t blow a hole in S&P´s argumentation and – more important – none of the European leaders can. What they did in December was too little, too late and everybody knew that within two days.

The fact that France and Austria are downgraded from AAA to AA+, makes it even harder to maintain the AAA-rating of the EFSF (European Financial Stability Facility).The rating of this emergency fund now depends on the guarantees of only four countries with an AAA-rating: Germany, The Netherlands, Luxembourg and Finland.

And that is a very heavy burden to carry for only four countries of which three have very narrow shoulders, financially speaking.


  1. Quite narrow shoulders! Luxembourg and Finland especially are so tiny, that could they realistically do? At some point, it is inevitable that this will catch up with Germany as well.

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