Standard & Poor's said Germany and France may be stripped oftheir AAA credit ratings as the debt crisis prompts 15 euro nationsto be put on review for possible downgrade.

The euro area's six AAA rated countries are among the nations tobe placed on a negative outlook, and their credit ratings may becut depending on the result of a summit of European Union leaderson Dec. 9, S&P said today in a statement. The euro reversed itsgains and U.S. Treasuries rose earlier today after the FinancialTimes reported that the credit-ranking firm planned to reduce sixAAA outlooks.

“Systemic stress in the eurozone has risen in recent weeks andreached such a level that a review of all eurozone sovereignratings is warranted,” S&P said in a statement.

The downgrade warnings come as German Chancellor Angela Merkeland French President Nicolas Sarkozy push for a rewrite of the EU'sgoverning rules to tighten economic cooperation in a demonstrationof unity on ending the debt crisis. With the fate of the currencyshared by the 17 euro countries at risk, Merkel and Sarkozypresented a common platform for a Dec. 8-9 summit of EU leaders inBrussels that aims to halt the crisis now in its third year.

“The S&P move is yet another signal that euro area countriesmust take decisive action to deal with the crisis or else theproblems will spread from Greece and others with the most acutefiscal problems to the rest of the euro zone,” said Phillip Swagel,a professor of economics at the University of Maryland's School ofPublic Policy who was an assistant secretary for economic policy inthe George W. Bush administration. “It is time for Germany andFrance to act — either to save Greece and the others or to let themfail.”

The firm said that ratings could be cut by one level forAustria, Belgium, Finland, Germany, Netherlands and Luxembourg, andby up to two notches for the other governments.

S&P said it maintained the negative outlook for Cyprus, andGreece wasn't put on “creditwatch.”

S&P roiled global equity, bond, currency and commoditymarkets on Nov. 10, when it sent and then corrected an erroneousmessage to subscribers suggesting France's rating had beendowngraded.

Downgrades of Germany and France would affect the rating of theEuropean Financial Stability Facility, the bailout fund forstruggling euro member countries that has funded rescue packagesfor Greece, Ireland and Portugal partially through bond sales. Ifthe EFSF has to pay higher interest on its bonds, it may not beable to provide as much funding for indebted nations.

EFSF Yields

Yields on EFSF 3.375 percent bonds due in July 2021 2 basispoints, snapping a five-day rally, to 3.6 percent, according toBloomberg prices.

“Negative news is going to continue to spur rallies in theTreasury markets, at least until the ECB steps in to end this messonce and for all,” Guy LeBas, chief fixed-income strategist atJanney Montgomery Scott LLC in Philadelphia, said before theannouncement. “With the euro currency in a state of flux, the U.S.markets remain the only true safe haven.”

S&P downgraded the U.S.'s AAA credit rating by one level toAA+ for the first time Aug. 5, citing the nation's politicalprocess and criticizing lawmakers for failing to cut spending orraise revenue enough to reduce record budget deficits.

Investors nevertheless sought Treasuries after the S&Prating cut sparked financial market turmoil. Treasuries gained 6.4percent last quarter, their best performance since the last threemonths of 2008, according to Bank of America Merrill Lynch indexdata.

The rating company's decision on the U.S. was flawed by a $2trillion error, according to the Treasury Department. S&Pdisputed the Treasury's assertions and said using the department'spreferred spending measures in its analysis didn't affect itscredit grade.

Moody's Investors Service and Fitch Ratings affirmed their AAAcredit ratings on Aug. 2, the day President Barack Obama signed abill ending an impasse with lawmakers over raising the nation'sdebt ceiling.

Federal Reserve Chairman Ben S. Bernanke said Treasurysecurities remain a core holding for investors. “The downgradedidn't scare off any investors,” and the action, along with theprospect of other downgrades, hasn't done “significant damage” tothe economy, Bernanke said at a Nov. 10 at a town-hall-style eventin El Paso, Texas.

German bunds are underperforming Treasuries for the first timesince the European debt crisis began in 2009.

Treasuries due in 10 years or more are 2011's best-performingsovereign securities, returning 26 percent as of Nov. 30, accordingto Bloomberg/EFFAS indexes. German 30-year bunds yielded more thantheir U.S. peers last month for the first time since May 2009 asthe government was only able to find buyers for 65 percent of a 6billion euro ($8.1 billion) offering on Nov. 23, its worst auctionin 16 years.

Credit-default swaps tied to France climbed 4 basis points onDec. 2 to 196 basis points, while contracts insuring against adefault on Germany's debt were about unchanged 97 basis points, CMAdata show. That compares with 51 basis points for credit swaps onthe U.S. and 90 basis points for the U.K.

A basis point on a credit-swap contract protecting $10 millionof debt for five years is equivalent to $1,000 a year. Swaps paythe buyer face value in exchange for the underlying securities orthe cash equivalent should a borrower fail to adhere to its debtagreements.

Bond yields of countries stripped of their AAA ratings since1998 have historically been little changed following the creditgrade change, according to an Oct. 28 report from JPMorgan Chase& Co. analysts led by Terry Belton, global head of fixed-incomeand foreign-exchange research. The yield on 10- year Japanesegovernment debt rose 10 basis points the week after it was cut toAa1 by Moody's in November 1998. The interest rate declined 3 basispoints following the cut by S&P to AA+ in February 2001.

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