Eurozone Ratings Cuts Hit 2012 Confidence Levels

Friday the 13th saw the eurozone crisis dragged back to confront investors larger and small around the world.

As a result, the EU and eurozone are about to undergo their biggest test so far of the 30 month crisis after Standard & Poor's cut the ratings of nine European economies, including AAA-rated France and Austria, a move that throws the so-called financial firewall into doubt.

S&P's cuts will make it more difficult for European leaders to solve the debt crisis and could trigger a period of market uncertainty similar to what investors experienced last August after S&P cut America's once mighty AAA rating last August.

At the same time the debt restructuring talks with Greece, which triggered the crisis in the closing months of 2009, hit a big problem on Friday, raising the prospect of default or worse in the next month if talks are not resumed as soon as possible and agreement reached.

Rumours of the expected downgrades by S&P swept markets in Europe and the US early Saturday morning, our time, with the actual changes happening after trading closed in New York around 8 am Saturday.

Nine of the 17 members of the eurozone had their credit ratings cut by S&P.

But it could have been worse. Back in early December S&P put 15 of the zone's 18 countries on credit watch.

S&P cut France, Austria, Malta, Slovakia and Slovenia by one notch, stripping France and Austria of their AAA ratings that were key to their ability to support efforts to rescue struggling eurozone members through the stability fund and a planned new fund.

The ratings agency also downgraded by two notches Italy, Spain, Portugal and Cyprus. Portugal and Cyprus were cut to junk status.

France's triple A rating was cut to double A plus, as was Austria's.

Germany, the Netherlands, Finland and Luxembourg kept their triple A ratings and are now among just 14 countries to enjoy that rating (Australia is one of those).

After S&P cut the ratings of Italy, Spain and Portugal by two notches, we now see Spain at A, Italy is now rated BBB+ and Portugal's rating was slashed to a junk grade of BB.

S&P added that the ratings outlook on 15 of the eurozone's 17 nations was now negative, meaning further downgrades could happen in the next year or so.

The S&P move was expected: it was mooted two months ago.The next move will come from other ratings groups, Moody's and Fitch in coming weeks.

S&P said it was taking the actions because Europe's leaders had failed at recent meetings to take decisive steps to solve the region's debt crisis.

It specifically noted that a December 9 summit deal did not go far enough.

"The political agreement does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those euro zone sovereigns subjected to heightened market pressures," S&P said in a statement.

And S&P went further, casting doubt on Europe's approach of insisting on tough austerity measures as the main path to restoring financial stability in Europe.

"We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating," the agency said.

It highlighted rising external imbalances and divergences in competitiveness between the euro zone's core and the so-called ''periphery'' as a significant source of the bloc's problems that needed to be addressed.

The cuts put 14 eurozone states on negative outlook for a possible further downgrade including France, Austria, and still triple-A rated Finland, the Netherlands and Luxembourg.

Germany was the only country to emerge totally unscathed with its triple-A rating and a stable outlook.

The US dollar rose, as did the Aussie dollar, while the euro dropped; gold and oil were mixed, with the former losing ground as the greenback rose.

The downgrades came hours after the deal to write down Greek government bonds hit a stumbling block.

According to banking industry groups, the talks have been put on "pause" to allow further "reflection".

The Institute of International Finance (IFF) said Friday's negotiations in Athens have "not produced a constructive consolidated response by all parties" and the discussions were being put on hold.

It was unclear when the talks will resume.

IIF officials have been in talks with Prime Minister Lucas Papademos' government about the merits of a plan to voluntarily reduce the value of Greek bonds by 50% as part of the second Greek bailout last October, which remains up in the air.

The deal would amount to €100 billion and would help reduce the nation's debt load to 120% of GDP by 2020, which is still too high.

Unless a deal is reached soon with the banks on the so-called 'haircut' on their debts, Greece could default on its debts in February when the bailout deal was expected to be completed.

According to various newsagency reports, the banks are objecting to Greek demands for the write downs to be accepted voluntarily (there by avoiding the possibility of a default being declared by a rogue bank).

As well the Greek government has reportedly been calling for even bigger write downs, angering some bondholders involved in the talks.

Later today, representatives from the IMF, EU and European Central Bank -- known as the troika -- will meet with Greek officials to review the nation's finances. It won't be an easy meeting with growing fears that Greece will miss its targets for 2011.

The double blow of the S&P news and the stalling of the Greek debt talks overshadowed the 'good news' came of Spain and Italy rolling over debt at lower borrowing costs during the week.

The news reignited fears about the fiscal sustainability of the eurozone and the knock-on effect on its stability fund, which could now lose its own triple A rating, reducing its firepower or forcing eurozone nations to increase contributions yet again.

According to Fitch ratings, the French downgrade will reduce the 440 billion euro lending capacity of the European Financial Stability Fund, the euro bail-out mechanism, to 293 billion euros.

It has already committed around 250 billion euros to Greece, Ireland and Portugal.

There's nothing left to defend Italy, or to help the region's banks should Greece default.

It's now up to the European Central Bank which has a second auction of three year funds next month on top of the December auction which allocated 489 billion euros to 538 banks across Europe.

That helped stabilise the situation over the holidays, but not for long.