S&P Stuns France, Germany with Downgrade Warning

The Euro sculpture is seen in front of the European Central Bank (ECB) headquarters in Frankfurt, Germany. Photo by EPA/BGNES

Ratings agency Standard and Poor's has put almost the entire eurozone, including Germany and France, on "credit watch" due to fears over the impact of the deepening debt crisis.

S&P's move means six countries with top AAA ratings would have a 50% chance of seeing their ratings downgraded.

The only two countries not put on credit watch on Monday were Cyprus, which is already under review, and Greece, whose rating has already been severely downgraded.

"Systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole," the ratings agency said in an official statement.

According to S&P's analysts that these systemic stresses stem from five interrelated factors:

(1) Tightening credit conditions across the eurozone;

(2) Markedly higher risk premiums on a growing number of eurozone sovereigns, including some that are currently rated 'AAA';

(3) Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among eurozone members;

(4) High levels of government and household indebtedness across a large area of the eurozone;

(5) The rising risk of economic recession in the eurozone as a whole in 2012.

S&P expects output to decline next year in countries such as Spain, Portugal and Greece, but it now assigns a 40% probability of a fall in output for the eurozone as a whole.

Early reports of the move had an impact on the financial markets. The news came as a surprise to investors and saw stocks fall back on early gains as the euro also fell.

The benchmark Dow Jones index closed up 78.4 points having lost ground from far stronger gains earlier in the day.

The euro fell 0.5% against the dollar to .338.

The news overshadowed talks in Paris between French President Nicolas Sarkozy and German Chancellor Angela Merkel, who proposed that a new EU treaty is adopted to tackle the crisis.

They said all 17 eurozone states should should face greater checks on their budgets and sanctions if they run up deficits, and that a new treaty should be completed by March to make sure such a crisis never happened again.

On Tuesday US Treasury Secretary Timothy Geithner arrives in Germany before travelling to France and Italy for talks with euro leaders.

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