The financial communities were particularly concerned on Friday, as S&P made threats to downgrade a number of Eurozone countries. After a number of efforts to fix the debt crisis in the Eurozone and many efforts by the European Central Bank to keep interest rates in check, the rating agency’s decision to start cutting debt is seen as a major concern to investors all over the world.
At 3 pm EST, S&P announced that it was cutting Italy’s credit rating from A to BBB+. Although Italy’s bonds are still considered investment grade, this decision shows that Standard and Poors is particularly concerned with the creditworthiness of the country. This is problematic for the Italian government, because they must refinance 30 billion euros by the end of the month.
France was also forced to sacrifice its prized AAA credit rating. This was a much bigger concern for the financial community than the downgrade to Italian long-term debt. While Italy has been recognized as one of the primary problems for the debt crisis in the Eurozone, France was one of the two countries that was believed to be a potential solution to the debt problems facing the Eurozone. The downgrade dissipates many of the hopes the financial community had that France and Germany would be able to save the Eurozone from collapsing.
S&P’s explanation for France’s downgrade was that the country had a number of problems with its political process and concerns over steps to get its budget deficit under control.
Perhaps the only redeeming facet was the fact that Germany still retains its AAA rating. With France receiving a downgrade, more eyes will be on Germany to help fix the debt problem. At least that is what a representative from S&P said earlier. Of course, that person chose to remain anonymous, because may have been violating securities laws by disclosing that information prematurely. Investors have not given up hope that the debt crisis will be resolved. However, they are clearly much more pessimistic after today’s announcements.
For the time being, the downgrades have not had a substantial impact on the borrowing costs of these countries. The French downgrade has increased the borrowing costs by 3 basis points, while the Italian downgrade has raised them by 1 basis point. However, the long-term impacts remain to be seen.
