Debate over S&P’s Euro Downgrade Rumbles On

Worries abound that Standard & Poor’s initial downgrade will lead to further relegations across the EU

Worldwide credit ratings agency Standard & Poor’s decision to downgrade the ratings of nine countries within the Eurozone in January 2012 affected the entire world.

After the downgrade, some investors and market analysts voiced concerns regarding how this action will affect the longevity of Europe’s economic outlook, while others believe that the ratings are largely meaningless and will not pose a threat to long-term recovery.

Factors in the downgrade According to Standard and Poor’s, there were several reasons for the ratings downgrade. The agency believes that the entire eurozone economy has been weakened by the global recession and that there are no signs pointing to an imminent rebound. Adding to the agency’s concerns is the perceived reluctance of governments to address the looming debts held by many of these nations. For example, French president, Nikolas Sarkozy, has been unwilling to take decisive measures, such as raising taxes and reducing spending, due to an upcoming election. Commenting on the downgrade, Sarkozy remarked that the action “changes nothing”. Only four eurozone countries, Germany, Finland, the Netherlands and Luxembourg, have retained their AAA+ bond rating.

Ratings agencies such as Standard & Poor’s, issue their ratings based on an overall view of the perceived economic worth of a country. A country that receives a AAA+ (the highest grade) rating is viewed as a strong investment, due to the expectation that the nation will be able and willing to repay its debts in a timely manner. The US suffered a similar ratings downgrade in the summer of 2011 when S&P took the view that its outstanding debt was a credit risk. A weak national economy is another risk factor that can lead to a ratings downgrade. If a country’s GDP is stagnant, or worse, declining, ratings agencies have no basis to believe that lenders will be able to recoup their loaned funds quickly.

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