Standard & Poor’s Downgrades Euro Zone Countries, Germany Stays Solid

The week ended on negative news as S&P (NYSE:MHP) downgraded the debt on numerous euro zone countries after market hours on Friday. This included France (NYSEARCA:EWQ), Austria (NYSE:EWO), Italy (NYSE:EWI) and Spain (NYSE:EWP). Germany (NYSEARCA:EWG) dodged the bullet and kept its triple-A rating. For the day, S&P cut the ratings of nine euro zone countries.

France and Austria saw its debt cut to double A plus, while Italy, Spain and Portugal dropped two ratings. Portugal’s grade is now so low, it has “junk” status by S&P but last year, Moody’s and Fitch also cut it to that lowly status. Ireland maintained its rating.

The French took the downgrade in stride and the French Finance Minister Francois Baroin said the cut was not “a catastrophe.”  He noted, “The United States, the world’s largest economy, was downgraded over the summer. You have to be relative, you have keep your cool. It’s necessary not to frighten the French people about it.”

The downgrades will further hamper the euro zone’s ability to fight its debt crisis. It also caused a backlash across the countries. Olli Rehn, EU monetary affairs commissioner, called S&P’s actions “inconsistent” and suggested “they ignored the ‘decisive action’ taken by the eurozone to commit to budget, structural and banking-sector reforms, and to a more powerful rescue fund,” according to the Financial Times.

Lisbon, who found the downgrade “ill-founded” and with “inconsistencies,” has a lot of work to do among the euro zone countries. The finance ministry, in a statement, that it pledged a commitment to the European Union and International Monetary Fund’s fiscal targets in accordance with the rescue package.

It added, “There is no doubt that the fiscal target for 2011 was achieved” and noted that 2011’s budget deficit would not come in higher than 4 per cent of gross domestic product but lower than the agreed upon 5.9 percent target.

Greece Debt-Restructuring, Fiscal Discipline Treaty 

Also affecting the euro zone on Friday was the failed debt-restructuring talks between Greece and its debt holders. This story dominated news earlier in the day but by day’s end, talks had collapsed over an agreement on the size of bondholders’ losses. Greece could now face a default on its bonds in March.

Over in Frankfurt, the European Central Bank criticized a new fiscal discipline treaty draft for the euro zone. It believed the newest version was “a substantial watering-down” of tough deficit levels that could allow “easy circumvention of the [deficit] rule” by troubled governments, according to the Financial Times.

ECB endorsement had been viewed as vital since as one of the main tenets of the new debt and deficit rules was to give the bank greater latitude to purchase Italian and Spanish bonds, decreasing their high borrowing costs.

In letter by Jörg Asmussen, an ECB executive board member, he wrote according to the Financial Times, “These revisions in my view clearly run against the spirit of the initial general agreement on an ambitious fiscal compact.”

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To contact the reporter on this story: Debbie Baratz at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com