When Standard & Poor’s put 15 nations within the euro zone on credit watch for a possible rating downgrade, it said that it would be watching the results of this week’s summit very closely. While rallying stock markets are giving the summit the thumbs-up, what is S&P likely to do about its threat?
Adam Cole, global head of foreign exchange strategy at RBC Dominion Securities, believes that it is more likely than not that S&P will downgrade most of the euro zone member states in the coming days.
“The EZ heads failed to reach an agreement with the U.K. in particular and, as such, Treaty amendments will affect only the 17 EZ member states,” he said in a note. “The impact of the summit had in any case been diminished by the ECB press conference yesterday as the question of whether the measures were sufficient to prompt more aggressive ECB bond market intervention no longer needs answering.”
On Tuesday, S&P put 15 of the 17 countries within the euro zone on “credit watch negative” meaning that there was a 50 per cent chance of a downgrade within the next 90 days. However, S&P made it clear that the 90 days probably weren’t necessary: “We are of the view that the upcoming European summit on December 8 and 9 provides an opportunity for policymakers to break the pattern of what we consider to have been defensive and piecemeal measures to date, overcome individual national interests and preferences, and advance a credible response to the crisis that would go far towards restoring investor confidence.”
And: “Our CreditWatch actions signal our view of the risks to euro zone sovereign creditworthiness should the summit not generate an effective and credible response.”
S&P, it is now your move.