Mass euro zone ratings downgrades are unlikely to shake up investors too much, but with Greek debt talks at an impasse, pressure has been loaded on the bloc to shore up its defences and glimmers of optimism from last week have been firmly doused.
With the United States and Japan already downgraded from "AAA", the likes of France and Austria are in good company and Standard & Poor's ratings cuts had been flagged in December. Nonetheless, the upbeat tone that surrounded last week's strong Spanish bond auction now seems a distant memory.
"The euro zone crisis is now dominating market activity again, after a period in which better economic news from the US, and easier monetary policy in China had helped markets move higher," said Dominic Rossi, chief investment officer, equities, at Fidelity Worldwide Investment.
Shares in Asia fell more than 1% on Monday in reaction to the S&P downgrades and the euro hovered near a 17-month low against the dollar.
US. markets are closed for the Martin Luther King holiday, but the euro zone will not have to wait long for a test of investor appetite.
France will attempt to sell up to 8 billion euros of debt on Thursday and Spain will tap the market again after a successful bond auction last week where it raised twice as much as expected at lower borrowing costs.
Analysts put that success down to the flood of cheap 3-year money the European Central Bank pushed into the banking system in December. It will make the same offer in February, fostering hopes that it can avert a credit crunch and helped bolster struggling euro zone debt issuers to boot.
ECB Governing Council member Ewald Nowotny said on Sunday the central bank would do all it could to calm the situation after the downgrade.
"Everything that is within our possibilities will be done to bring about a relaxation (of the situation)," he said on television in Austria.
But the twin blows of the serial S&P downgrades and the stalled Greek bond swap talks have cast another pall of gloom. This time, Spain will try to sell longer-term debt, which could be tougher.
"While the market impact of the downgrades is unlikely to be very significant in the short term, they serve as a stark reminder that the euro area sovereign crisis is here to stay," analysts at RBS said. "We continue to expect the crisis to deepen eventually leading to further widening in spreads across countries vis-a-vis Germany."
After downgrading nine of the euro zone's 17 countries, S&P said it would decide shortly whether to do the same for the currency area's EFSF bailout fund. Ratings cuts for commercial banks are probably imminent too.
"Speculation around an EFSF downgrade will now grow, complicating its ability to raise capital and displace the ECB in the sovereign bond purchasing programme," Rossi said. "Both the ECB and the IMF will get sucked further into central roles."
A senior euro zone official said the EFSF could retain its AAA rating with Standard & Poor's through higher guarantees from the euro zone's remaining triple A countries or lower lending capacity.
Still, German Finance Minister Wolfgang Schaeuble said on German radio on Monday that German guarantees for the EFSF were sufficient.
Negotiations with the banks on a bond swap scheme designed to eat into Greece's colossal debts are expected to restart on Wednesday with Athens warning of catastrophe if they fall apart.
Without a deal, a planned 130 billion euro Greek bailout of which the bond swap is a vital part will be fundamentally holed, raising the prospect of default in March when massive bond payments are due. That, rather than the long-anticipated S&P downgrades, looks to be the bigger worry for investors.
"At this stage, there is a growing risk of a coercive rather than voluntary debt restructuring, even though the latter is still our base case," said Joachim Fels, economist at Morgan Stanley.
