Standard & Poor’s will say that Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts all 17 euro nations to be put on review for possible downgrade, two officials familiar with the S&P decision said.
The euro area’s six AAA rated countries are among the nations to be placed on a negative outlook pending the result of a summit of European Union leaders on Dec. 9, the people said today on condition of anonymity because the decision has yet to be announced. The euro reverse gains and U.S. Treasury bonds gained after the Financial Times reported earlier that the credit-ranking firm planned to reduce the outlooks, without citing the source of the information. John Piecuch, a spokesman for S&P in New York, had no comment.
The downgrades warning come as German Chancellor Angela Merkel and French President Nicolas Sarkozy push for a rewrite of the EU’s governing rules to tighten economic cooperation in a demonstration of unity on ending the debt crisis. With the fate of the currency shared by the 17 euro countries at risk, Merkel and Sarkozy presented a common platform for a Dec. 8-9 summit of EU leaders in Brussels that aims to halt the crisis now in its third year.
“Negative news is going to continue to spur rallies in the Treasury markets, at least until the ECB steps in to end this mess once and for all,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “S&P can serve to spook the markets, but I don’t think we’ll see any fresh policy action based solely on a ratings agency’s opinion.”
Yields on EFSF 3.375 percent bonds due in July 2021 2 basis points, snapping a five-day rally, to 3.6 percent, according to Bloomberg prices.
“With the euro currency in a state of flux, the U.S. markets remain the only true safe haven,” LeBas said. “The EFSF, while a great idea, is now too late to offer much assistance.”
S&P roiled global equity, bond, currency and commodity markets on Nov. 10, when it sent and then corrected an erroneous message to subscribers suggesting France’s rating had been downgraded.
Downgrades of Germany and France would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales. If the EFSF has to pay higher interest on its bonds, it may not be able to provide as much funding for indebted nations.
S&P downgraded the U.S.’s AAA credit rating by one level to AA+ for the first time Aug. 5, citing the nation’s political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce record budget deficits.
The rating company’s decision on the U.S. was flawed by a $2 trillion error, according to the Treasury Department. S&P disputed the Treasury’s assertions and said using the department’s preferred spending measures in its analysis didn’t affect its credit grade.
German bunds are underperforming Treasuries for the first time since the European debt crisis began in 2009.
Treasuries due in 10 years or more are 2011’s best- performing sovereign securities, returning 26 percent as of Nov. 30, according to Bloomberg/EFFAS indexes. German 30-year bunds yielded more than their U.S. peers last month for the first time since May 2009 as the government was only able to find buyers for 65 percent of a 6 billion euro ($8.1 billion) offering on Nov. 23, its worst auction in 16 years.