euroThe rating agency cut the rating of 9 Eurozone countries. France, the second largest economy of the Eurozone, lost the highest grade while Germany was able to keep it. Italy and Spain were downgraded by two notches, while France by only one notch.

France was downgraded one notch from AAA to AA+ with negative outlook. F. Baroin, French Finance Minister, said that the reduction of one level, puts France at the same grade as the US. “It’s not a catastrophe”. The rating agency warned months ago about the possibility of a massive downgrade in the Eurozone. The same rating agency downgraded the US in 2011. According to S&P, there is a 1 in 3 chance that France could be downgraded again in 2012 or 2013. “The downgrade reflects our opinion of the impact of deepening political, financial, and monetary problems within the eurozone, with which France is closely integrated,” said S&P.

Italy and Spain were downgraded by two notches to BBB+ and A respectively. Austria, Malta, Slovakia, and Slovenia were cut by one notch. Cyprus lost two notches and was downgraded to junk status while Portugal was also cut by two notches. Germany, Estonia, Belgium, Finland, Luxembourg, Ireland and Netherlands kept its rating.

“The outlooks on our ratings on all but two of the 16 eurozone sovereigns are negative. The ratings on all 16 sovereigns have been removed from CreditWatch, where they were placed with negative implications on Dec. 5, 2011”, affirmed S&P. The action taken reflects that policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone, according to S&.

It is not clear how recent action could affect the EFSF that will hold a bond auction next Tuesday. The Eurozone bailout fund could be downgraded next, as many of its funders were, including the second largest backer, France. According to Megan Greene, from Economistmeg.com, the downgrade of France just means that the EFSF would face higher borrowing costs. “Not a deal breaker, but downgrades are a slippery slope”, she twitted.

Rumors and confirmations by authorities started before European market close. Stocks finished in negative territory in Europe an in the US but far from the lows. In Wall Street the Dow Jones lost 0.39% and the Nasdaq 0.51%. In Europe, main indexes finished lower: CAC 40 -0.11%, DAX -0.58% and FTSE 100 -0.46%.


Another event on Friday that increased risk aversion and added more pressure to the Euro was the fact that talks between Greek authorities and the Institute of International Finance were suspended. Negotiations between Greece and its creditors are likely to resume on Wednesday. Analysts suggested that recent events are likely to increase Greece’s probabilities of a default.

Downgrades and lack of definition regarding how Greece could reduce its debt were too much for the Euro that fell sharply in the market on Friday, trimming previous gains in many crosses. The Euro weakened across the board and reached fresh lows. EUR/USD dropped to 1.2621 during the American session, shortly after French authorities confirmed the downgrade. The pair posted the lowest weekly close since September 2010. Pressure over the Euro remains and Monday opening will probably be watched by many traders, despite the holyday in the US.