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13 January 2012

S&P takes various rating actions on 16 eurozone sovereign governments, including downgrading France and Austria to AA+


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Standard & Poor's today announced its rating actions on 16 members of the eurozone, following completion of its review. The outlooks on the long-term ratings on just two coutries, Germany and Slovakia, are stable.


S&P 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. All ratings have been removed from CreditWatch, where they were placed with negative implications on December 5, 2011 (except for Cyprus, which was first placed on CreditWatch on August 12, 2011).

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, indicating that S&P believes that there is at least a one-in-three chance that the rating will be lowered in 2012 or 2013. The outlook horizon for issuers with investment-grade ratings is up to two years, and for issuers with speculative-grade ratings up to one year. The outlooks on the long-term ratings on Germany and Slovakia are stable.

S&P assigned recovery ratings of '4' to both Cyprus and Portugal, in accordance with S&P's practice to assign recovery ratings to issuers rated in the speculative-grade category, indicating an expected recovery of 30-50 per cent should a default occur in the future.

Today's rating actions are primarily driven by S&P's assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to address ongoing systemic stresses in the eurozone fully. In S&P's 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 December 9, 2011, and subsequent statements from policymakers, lead S&P to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to address the eurozone's financial problems fully. In S&P's opinion, the political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those eurozone sovereigns subjected to heightened market pressures.

S&P also believes 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 S&P's 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, S&P believes 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.

Accordingly, in line with its published sovereign criteria, S&P has adjusted downward its political scores for those eurozone sovereigns it had previously scored in its two highest categories. This reflects S&P's view that the effectiveness, stability, and predictability of European policymaking and political institutions have not been as strong as we believe are called for by the severity of a broadening and deepening financial crisis in the eurozone.

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© S&P - Standard and Poor


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