Italy and Spain were downgraded by two notches to BBB+ and A respectively. Austria, Malta, Slovakia, and Slovenia were cut by one notch. Cyprus lost two notches and was downgraded to junk status while Portugal was also cut by two notches. Germany, Estonia, Belgium, Finland, Luxembourg, Ireland and Netherlands kept its rating.
The mass downgrade follows S&P’s decision last August to strip the US of its top credit rating.
European leaders, including Germany’s Angela Merkel, have urged countries to tighten their belts with higher taxes and deep spending cuts to rein in massive budget deficits. But that has heightened market concern about their ability to grow their way back to health, pushing borrowing costs even higher for heavily indebted governments.
Downgrades and lack of definition regarding how Greece could reduce its debt were too much for the Euro that fell sharply in the market on Friday, trimming previous gains in many crosses. The Euro weakened across the board and reached fresh lows. EUR/USD dropped to 1.2621 during the American session, shortly after French authorities confirmed the downgrade.
Pressure over the Euro remains and Monday opening will probably be watched by many traders, despite the holyday in the US.
The decision may add to the debt problems as it is likely to increase euro zone borrowing costs across the board.
The move could trigger a series of downgrades of large European banks, companies and government entities. This could include the European Financial Stability Facility, or EFSF, the fund created to rescue troubled euro zone countries. A downgrade of the EFSF could increase its borrowing costs, reducing its ability to protect the currency bloc’s weaker members. n Friday.