Financial markets were in suspense on Tuesday, and the Euro slipped against the greenback after Standard & Poor's (S&P), a unit of The McGraw-Hill Companies (MHP), placed 15 European nations on review for a potential downgrade.
The rating agency stated that it may downgrade the entire block of nations, including six with the highest “AAA” rating, after evaluating the impact of the European summit later this week. Six of these countries — Luxembourg, the Netherlands, Finland, Germany, Belgium and Austria — could be knocked down a notch while the others may see their rating tumble by two notches.
The agency justified its hawkish stance by pointing out that systemic problems are jeopardizing the credit quality of the entire region, and that the delay is not helping matters.
Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France are leading the effort to discuss ways for resolving the crisis at the summit. U.S. Treasury Secretary Timothy Geithner is undertaking his fourth trip across the Atlantic since last September, underscoring the importance paid by the Obama Administration to avoiding a meltdown in Europe.
Recently, the German Chancellor stressed the importance of a stable Euro while the French President sought to reassure European creditors. The two leaders have been vocal in favoring a change to the EU treaty despite objections from several member states.
Italy, the largest debtor struggling with its debt service obligations, pointed to the dire necessity of resolving the crisis when its yields recently hovered at the 7% mark. Since then, it has offered a ray of hope as its borrowing costs have dropped following austerity measures undertaken by its government.
The latest move by the largest global rating agency comes shortly after S&P downgraded the U.S. sovereign rating from AAA to AA+ following the gridlock in Washington, D.C. over how to reduce the massive federal deficit.
From a longer-term perspective, the rating industry has been under regulatory fire for failing to foresee the financial crisis of 2008 and, in fact, assigning investment-grade ratings to sub-prime mortgage bonds. More recently, the rating agencies collectively failed to sound the alert on MF Global Holding, which went on to become one of the largest bankruptcies in the history of the country.
The two other major credit rating agencies, Moody's Corp. (MCO) and Fitch Ratings, have stated that they too could shortly review ratings of Eurozone countries.
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