From the January 01, 2012 issue of Futures Magazine • Subscribe!

Chartview: S&P’s shot at Europe

Although credit rating agencies largely were blamed for being slow to act on sub-prime mortgage-backed securities a couple of years ago, some analysts say the pendulum may have swung to the opposite extreme. Just as the European Union was set to meet the week of Dec. 5 to discuss possible solutions to the European sovereign debt problem, Standard & Poor’s sent a warning shot to 15 of the top rated Eurozone nations that their ratings were in jeopardy.

This comes after S&P’s politically charged downgrading of U.S. sovereign debt this summer, a move that arguably could have been set in motion by its past failures to measure risk.

Click chart to enlarge.

"You go from extreme to extreme," says Greg Michalowski, chief currency analyst at FXDD. "In the old days when S&P was keeping instruments like mortgage-backed securities at high ratings, they were criticized for not seeing the dangers of the over-abundance of the debt in the market. I’m not surprised to see them go from one extreme to the other."

S&P’s notice that it had put Eurozone nations on Credit Watch Negative listed the Eurozone’s top-rated nations including Germany and France, which both were threatened with losing their AAA rating. Additionally, it also put the European Financial Stability Fund (EFSF) on Credit Watch Negative because its bonds have the backing of France, Germany and other countries in the Eurozone.

One of the complaints some analysts have expressed is that S&P may be getting too political in wielding its rating power. "It was a shot across the bow to make sure that the EU moves toward stricter enforcement of debt and fiscal policy so that it doesn’t happen again," Michalowski says. "EU leaders are playing chicken with the idea that if they don’t come up with something viable that their credit ratings could go down and that could lead to a snowball effect down the road."

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