Euro plunges to 16-month low, markets tank.
Euro zone governments are bracing for new debt-crisis turbulence after rating agency Standard & Poor’s told them it would downgrade two of the euro zone’s six triple A nations, according to a report in the Financial Times.
One official told the FT that France and Austria were due to be downgraded, but this was not confirmed by either the agencies or the governments. As soon as the news broke, European stock markets sank into the red and the euro plunged back under $1.27 as investors were rattled by the rumours.
In Athens, talks over restructuring Greece’s debt broke down, raising the prospect that Greece could become the first developed country in more than 60 years to undergo a full-scale default on its debt. S&P plans to downgrade France and Austria’s rating to AA+, the official said, leaving Germany as the only large triple A country underwriting the triple A rated euro zone rescue fund, the European Financial Stability Facility, FT said.
S&P warned the euro zone’s six triple A nations and nine others that it had put their creditworthiness on review in December as a result of the debt crisis and the worsening economic outlook. Since that warning, officials said, S&P had decided to leave the ratings of Germany, the Netherlands, Finland and Luxembourg unchanged at triple A, with their outlook unchanged at “stable”.
But one official called S&P’s move “worse than a blanket downgrade” as it could call into question the construction of the EFSF, which depends on Germany and France.
This could make it harder for the EFSF — which plans to raise €1.5 billion from a bond sale on Tuesday — to arrange financing in the markets for its aid packages for Ireland, Portugal and Greece, the official said, the paper said.
European shares and the euro, which were rising earlier Friday ahead of the rumours, went into reverse on talk of the potential downgrades. London’s benchmark FTSE 100 index of top shares fell 0.80 per cent to 5,616.92 points, Frankfurt’s DAX 30 slid 0.77 per cent to 6,131.07 points and in Paris the CAC 40 dropped 0.29 per cent to 3,190.65. The euro tumbled against the dollar on Friday, coming closer to a 16-month low hit earlier in the week, as fears about an imminent downgrade of euro zone countries and a lacklustre sale of Italian debt had investors betting against the common currency.
The European single currency, meanwhile, tumbled as low as $1.2686, near a 16-month low and compared with $1.2816 in New York late on Thursday. It remained within sight of Wednesday’s 16-month low of $1.2661.
