December 8, 2011

S&P: Entire 27-nation EU is At Risk of Downgrade


“Ratings agency Standard & Poor’s injected urgency into talks aimed at saving the euro currency from collapsing under the weight of huge state debt by warning Thursday that it may downgrade the bonds of all 27 EU nations.
The ratings agency said it was placing the EU’s AAA long-term rating on so-called CreditWatch negative. The warning came just days after S&P put a large number of the 17 euro countries on notice for a possible downgrade, including Germany and France.”

Keep in mind that S&P was one of the ratings agencies that conferred top credit ratings upon collateralized debt obligations during the housing bubble of the last decade. Those investment instruments packaged high risk loans with high quality ones, and brought about the credit crisis of 2008-2009 when over-extended homeowners defaulted on their mortgages.

That aside, if S&P and the other ratings agencies were to honestly revise their credit ratings of those countries in the direst conditions, several would have their debt rated as “junk.” The cost of financing that debt would balloon overnight, forcing those countries into default. A credit crisis would begin all over again.