S&P warns it might downgrade Eurozone credit ratings

Reporting from Washington —  Standard & Poor’s said its long-term ratings for nearly all countries in the Eurozone, including economic powerhouse Germany, were at risk of downgrade because of the ongoing debt crisis.

The ratings company said Monday that it put the sovereign debt of 15 nations on a negative credit watch because “systemic stresses” have risen to the point that they are putting “downward pressure” on the region as a whole.

Among the reasons were tightening credit, continued disagreements among policymakers about how to handle the crisis, a “rising risk” of a recession in the region in 2012 and high levels of government and household debt.

“We expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40% probability of a fall in output for the Eurozone as a whole,” S&P said.

The news, which began leaking out before U.S. markets closed Monday, rattled investors and cut into a rally by the Dow Jones industrial average that had been fueled by the announcement that French and German leaders would push for a plan to force Eurozone countries to stick to tough spending limits.

S&P’s move shortly after markets closed in New York led stock-index futures to drop across the board, indicating a lower open for stocks Tuesday.

The negative credit watch means S&P could downgrade the ratings of all the Eurozone countries — except Greece and Cyprus — within 90 days. Greece wasn’t warned because its low CC rating indicated “a relatively high near-term probability of default.” Cyprus had already been on negative credit watch.

S&P said it would review the credit ratings of the 15 nations after the European Union summit at the end of the week.

“We are of the view that the upcoming European summit ... provides an opportunity for policymakers to break the pattern of what we consider to have been defensive and piecemeal measures to date, overcome individual national interests and preferences, and advance a credible response to the crisis that would go far towards restoring investor confidence,” S&P said of its decision to make the downgrade warning before the meetings.

Germany’s long-term AAA rating is at risk, as are the AAA ratings of France, Finland, Austria, Luxembourg and the Netherlands.

S&P said it believes the long-term ratings of Germany, Austria, Belgium, Finland, Luxembourg and the Netherlands are unlikely to fall more than one notch if they are downgraded. The other nine Eurozone nations probably would not fall more than two grades.

In August, S&P downgraded the U.S. long-term credit rating one notch, to AA+ from AAA, because of the inability of leaders in Washington to strike a deal to rein in the nation’s growing debt.

jim.puzzanghera@latimes.com