Yesterday’s downgrade warning from the S & P has the potential to lower by one notch the highest credit ratings of Austria, Belgium, Finland, Germany, the Netherlands, and Luxembourg.
France shares the coveted AAA credit rating but they are the most likely to lose their coveted AAA rating among the six other nations. The S&P warned that France may fall one more notch to two notches in the event of a credit downgrade.
Europe’s rescue fund with the EFSF relies heavily on the good credit rating of the top 6 countries to secure a credit line. In the event of a future credit downgrade, the credit leverage of the EFSF will face increased pressure because of higher interest rates and borrowing costs.
During the warning on Monday, the S & P highlighted five important factors that are at the center of the credit debt crisis: tightening credit conditions, rising yields on bonds issued by top rated sovereigns, ongoing political deadlock over how to deal with the crisis, high levels of government and household debt, and risk of recession in Europe in 2012.
Finding New Solutions
Everything hinges on the outcome of Friday’s critical European Union Summit in Brussels where fiscal unity will be emphasized with the anticipation of forging a new unified fiscal pact in the European Union that may lead to a spreading of debt liability throughout all of the 17 countries of the euro zone.
The new warning signals yesterday from the S & P may be a sharp signal to Germany and France to “think big” and act decisively during Friday’s European Summit in Brussels otherwise they may face a credit rating downgrade in their own country and simultaneously send the global markets into a recession.
On Bloomberg’s First Look, Paul Donovan of UBS was quoted earlier in the day addressing the topic of the S&P’s latest warning.
Donovan said ” It may heighten the desirability of coming out with a compelling solution for the French and Germans.”
Failure to act decisively without any financial firepower during Friday’s European Summit may see the stability of the European Union erode and disintegrate into disunity and discord.
My article from yesterday about Italy PM Mario Monti taking steps to restore Italy’s economy incorrectly listed Italy’s austerity package amount as 300 billion euros. It should have been listed as 30 billion (it was revised later in the day by this blogger).