S&P Puts 15 Eurozone Sovereigns On CreditWatch With Negative Implications

(December 6, 2011) — Standard & Poor’s has put 15 Eurozone states on warning for downgrade, possibly stripping Germany and France of their AAA ratings. 

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

The ratings agency revealed that the 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; and 

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

One of the implications of Eurozone turbulence, according to a recent study by Bank of America Merrill Lynch, is money managers seeking US and emerging market equities.

According to the firm’s November survey of fund managers, a net 27% of investors are overweight in emerging markets for the month, up from a net 9% in October. Meanwhile, a net 20% of investors are overweight in US equities, up from a net 6% in October.

A total of 72% of European managers who responded to the survey believe that Europe will sink into a recession in the next 12 months, up from a net 37% in October. Yet, fears about a global recession have waned slightly, with a net 31% of global investors expecting the world economy to avoid a recession, up from a net 25% the previous month.