(NEW YORK) — Nine European nations, including France and Italy, recently have seen their credit ratings cut.
Greece’s rating was reduced by Standard & Poor’s to “CC” — junk grade — the lowest given by the rating service to any of the nations that it tracks. Both S&P and competing credit-rater Fitch say a Greek default now looks likely.
S&P’s ratings for Cyprus, Portugal and Spain, and Italy each fell two notches; those for Austria, France, Malta, Slovakia and Slovenia fell by one. The company said in a Jan. 13 statement that its outlook on all but two of the 16 eurozone sovereigns is now negative.
In all the eurozone, only Germany, Europe’s number one economy, retains an AAA rating.
Not everyone, however, is trembling in their boots. French President Nicholas Sarkozy, for example, brushed off his country’s downgrade and dismissed it as irrelevant, telling reporters, “At the core, my conviction is that it changes nothing.”
World markets seemed to share his view. Investor demand for an auction of French debt Monday was solid. And around the world, markets remained mostly calm — none dropped precipitously.
Yet investors, especially anyone exposed to sovereign debt, have got to be asking themselves: What nation will be next to be downgraded? Which, besides Greece, might actually default?
Were Montenegro, say, to default, the damage to the U.S. economy would be small, if any. But the default of a major U.S. trading partner in Western Europe would be another matter.
The prediction of Peter Morici, a professor at the University of Maryland’s Smith School of Business, is bleak. In his scenario, the euro will collapse, “and chaos will follow.”
Such chaos will include defaults by other eurozone governments besides Greece. As European sovereigns return to their traditional currencies, they will remark their sovereign debt. The value of European government bonds denominated in dollars will plummet, and any investors left holding such bonds would be better off, quoting Morici, “holding Confederate currency for its collector value.”
Morici expects Western Europe to suffer further downgrades and other nations besides Greece to default. Of S&P’s most recent cuts, he says, “They got France right, but they got Germany wrong.”
By that he means that France deserved the lower rating, but that Germany should have been cut, too.
As for Italy, Morici says, it, too, is sicker than its newly downgraded rating (BBB+) would suggest.
S&P’s “negative” outlook for Italy means there is a 1-in-3 chance the country’s debt will be downgraded further in the next three months.
Copyright 2012 ABC News Radio
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