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(This story has been posted on The Wall Street Journal Online's Euro Crisis blog at http://blogs/wsj.com/eurocrisis)
Standard and Poor's Ratings Services, criticized for laxity during the financial crisis, has put Germany, France and 13 other countries in the euro zone on a downgrade warning. This includes six triple-A sovereigns.
That typically means there is at least a 50% chance of a downgrade within 90 days, but the firm has said it expects to announce any rating changes "as soon as possible" following this week's European Union summit, where policy makers are expected to lay out plans to enforce stricter budget rules.
S&P said the long-term ratings on Germany, Belgium, Austria, Finland, Luxembourg and the Netherlands aren't likely to fall by more than one notch, if at all. But it flagged a potential two-notch downgrade for France and other euro-zone nations.
It comes after the French President Nicolas Sarkozy and German Chancellor Angela Merkel Monday told members of the 27-nation European Union bloc that they must decide by the end of the week whether they want to be part of a more fiscally integrated ensemble.
The move by S&P reinforces the belief that Friday's summit will be a "make or break" moment for Europe.
TODAY'S HEADLINES
- S&P Warns on 15 Euro-Zone Nations
- Sarkozy, Merkel Issue Ultimatum
- European Stocks Dip
- Greek Politician Expects Recession Will Linger Longer
10:14 a.m. Euro Edges Lower, Equities Slip After S&P Warns on EFSF by Peter Nurse
The euro drifted lower and European equity markets continued to trade with a negative slant Tuesday following the decision by the Standard & Poor's ratings agency to place the long-term credit rating of the European Financial Stability Facility on credit watch negative.
While the decision to place the EFSF's long-term rating on negative watch is hardly a surprise given the warnings on the ratings of the sovereign nations that guarantee the EFSF, the move added to the negative tone surrounding the markets Tuesday.
At 1500 GMT, the euro traded at $1.3395, down from $1.3400 in late New York trade Monday. The currency was also at Y104.15, down from Y104.28.
Turning to equities, the benchmark Stoxx Europe 600 index was down 0.2% at 242.32. Paris's CAC-40 index was 0.3% lower at 3191.39, and Frankfurt's DAX was 0.9% lower at 6050.96. London's FTSE 100, outside the euro zone, was up 0.1% at 5576.35.
This variance was also noted in the sovereign debt market, with the benchmark December bund contract down 0.26 at 134.56, but the March gilt contract up 0.52 at 113.85, aided by robust demand at a sale of 30-year paper earlier Tuesday.
9:59 a.m. ECB Balance Sheet Hits Another Record High by William Launder
The euro zone's balance sheet reached another record high in the week ended Dec. 2, as the central bank continued buying euro-zone government bonds and lending massive sums to cash-strapped banks.
The balance sheet of the Eurosystem, which comprises the Frankfurt-based European Central Bank and the 17 euro-zone national central banks, grew by EUR16.14 billion compared with the previous week, settling at EUR2.436 trillion. This was EUR512 billion larger than a year earlier.
The ECB has been criticized for increasing the volume of its balance sheet due to the purchases of government bonds and other so-called nonstandard measures. But the ECB has repeatedly warned its balance sheet isn't at risk from its added size.
Net lending to credit institutions decreased by EUR60.9 billion to EUR128.8 billion. Last Wednesday a main refinancing operation of EUR247.2 billion matured and a new one of EUR265.5 billion was settled.
Earlier Tuesday, the ECB said it allotted EUR252.100 billion at its weekly main refinancing operation, down from EUR265.456 billion allotted last week.
9:38 a.m. Standard & Poor's Put EFSF Triple-A Rating on Watch Negative by Serena Ruffoni
Standard & Poor's Tuesday said it placed the long-term credit rating of the European Financial Stability Facility, or EFSF, on credit watch negative.
This follows the placement on watch negative of the six European sovereigns that guarantee its financial obligations.
The six sovereigns are triple-A rated Austria, Finland, France, Germany, Luxembourg and the Netherlands.
Standard & Poor's could downgrade the EFSF by one or two notches depending on the outcome of its review on the EFSF member sovereigns.
The rating likely will be the same as the lowest issuer rating, unless further credit enhancements are put in place. If this is the case, Standard & Poor's could affirm EFSF triple-A rating on the basis that these compensate the reduced creditworthiness of its guarantors.
The move to credit watch negative implies that there is at least a one-in-two probability of a downgrade in the short term. Standard & Poor's expects to reach a decision within 90 days, after it completes the review on its guarantor members.
9:17 a.m. French PM Breaking Headlines by WSJ Staff
- French PM: No European Country Is Safe From Crisis Impact
- French PM: Germany Won't Be Spared If Crisis Worsens
- French PM: Europe Must Reduce Debt
- French PM: Remains Committed to Fiscal Plan
- French PM: S&P View Calls for Stronger European Economic Governance
- French PM: Calls Italy's Monti Fiscal Plan "Ambitious"
- French PM: Deal With Germany on Euro Zone Economic Governance Is "Strong"
- French PM: We're Determined to Defend the Euro Zone
- French PM: Greek Support Plan Was a One-Off
9:03 a.m. S&P Statement on EFSF by WSJ Staff
The following is a press release from Standard & Poor's:
"On Dec. 5, 2011, Standard & Poor's placed its ratings on the 'AAA' rated sovereigns which guarantee the financial obligations of the European Financial Stability Facility (EFSF).
"As a result, we are also placing the 'AAA' long-term credit rating on EFSF on CreditWatch negative and affirming the 'A-1+' short-term rating.
"Depending on the outcome of our review of the ratings on EFSF member governments, we could lower the long-term rating on the EFSF by one or two notches, if any.
"The issuer and issue ratings we will assign to EFSF following our CreditWatch review will likely be the same as the lowest issuer rating we assign to the rated EFSF members we currently rate 'AAA', unless there are offsetting credit enhancements in place."
9:01 a.m. S&P Shakes Downgrade Stick at EFSF Bonds by Mark Gongloff
Standard & Poor's has fired a warning shot about a potential downgrade of the euro-zone bailout fund, the EFSF.
This wasn't exactly unexpected, given that S&P on Monday night shook the "Downgrade Stick" at every single member nation in the euro zone, including Germany and France, the AAA-rated countries that mainly backstop the EFSF.
Still, it's having a mildly negative effect on risk appetite this morning, pushing the euro below $1.34 and pushing U.S. stock futures lower.
8:57 a.m. S&P Puts EFSF Triple-A on Watch by WSJ Staff
Statement from S&P.
"Standard & Poor's Ratings Services today placed the 'AAA' long-term credit rating on the European Financial Stability Facility on CreditWatch with negative implications.
8:48 a.m. S&P EFSF Headline by WSJ Staff
- DJ S&P Places EFSF Long-Term 'AAA' Ratings On Watch Neg
8:27 a.m. More on Noyer's Criticism of S&P Move by William Horobin
European Central Bank governing council member Christian Noyer attacked Standard & Poor's Investors Service's move to place 15 euro-zone countries on credit watch negative, saying the rating agency's methodology had clearly become political and the euro-zone economy can quickly bounce back.
"It's a political judgment much more than one on economic fundamentals," Noyer said at a conference on the outskirts of Paris a day after S&P put the rating of 15 euro-zone nations on credit watch negative, citing deepening political, financial and monetary problems in Europe. "It's a change in universe."
Noyer also criticized comments from S&P for not taking into account an agreement announced earlier Monday between France and Germany to pursue treaty change in Europe to strengthen fiscal discipline and integration.
"These observations are totally out of step because as they come the same night that France and Germany agreed on big decisions to resolve the crisis...that seem extremely powerful to me," said Mr. Noyer, who is also governor of the Bank of France.
8:13 a.m. U.K. Dog in the EU Manger by David Cottle
There's always been a dark little rumor in circulation about why, precisely, the U.K. is in the European Union at all given the apathy if not hostility of its people towards anything that starts with 'Eur:' to make sure the whole project misfires.
It was put succinctly in the classic British BBC 1980s comedy Yes Minister, in which a cynical public-service mandarin outlines the country's game plan thus: "Minister, Britain has had the same foreign-policy objective for at least the last 500 years: to create a disunited Europe.
"In that cause we have fought with the Dutch against the Spanish, with the Germans against the French, with the French and Italians against the Germans, and with the French against the Germans and Italians.
"Divide and rule, you see. Why should we change now when it's worked so well?"
7:53 a.m. Danish PM Favors Swift EU Treaty Tweaks With EU-27 Backing by Flemming Emil Hansen
Denmark prefers only small, swift treaty changes that have the support of all EU countries, not just euro-zone nations, Prime Minister Helle Thorning-Schmidt said Tuesday.
Denmark's position on an emerging plan to amend the European Union's governing treaty to avoid a repeat of the euro zone debt crisis is particularly important because the country assumes the rotating European presidency on Jan. 1, meaning the Danes will have the task of steering any treaty changes during the first six months of next year.
Thorning-Schmidt said it's too early to say whether the changes would have to be approved by a national referendum in Denmark.
(MORE TO FOLLOW) Dow Jones Newswires
December 06, 2011 10:23 ET (15:23 GMT)
