EFSF Won't Escape S&P's Review Of European Credits

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In what many are painting as a make-or-break week for European policymakers, Standard & Poor��s warned that France, Germany and four other countries could lose their AAA credit ratings, a move that would also hurt the credit worthiness of the bailout fund in place for nations like Ireland, Portugal and Greece.

The European Financial Stability Facility (EFSF), the fund that politicians agreed to leverage up in order to provide a backstop for countries like Greece and potentially contribute to a rescue for the likes of Italy and Spain, could possibly be downgraded, S&P said. The news Tuesday comes as little surprise, given that the ratings agency put its credit rankings of 15 European countries on credit watch for potential downgrade Monday, including the AAA countries whose imprimatur is needed to keep the EFSF��s top-flight rating. (See “EFSF’s Rating Only As Strong As Its Weakest Link.”)

Wall Street was heading higher before S&P formally acknowledged that the EFSF is also under review, but stocks faltered heading toward the opening bell and were struggling to stay out of the red in the first half hour of trading.

While some see the S&P call as an impetus for European leaders to clear changes to the EU treaty that would impose sanctions on countries that fail to meet fiscal targets, as proposed by Germany��s Angela Merkel and France��s Nico! las Sark ozy Monday, the pressure from the market on countries like Italy has already lessened, perhaps in anticipation of such a deal that would pave the way for bailout loans.

Ten-year Italian bonds were yielding 5.93% Tuesday morning, far below their peaks well above 7%, while the yield on 10-year Spanish paper was up a hair but still off recent highs at 5.18%. Of course, those conditions can change rapidly if efforts at reform �C like the clearance of �30 billion in reform measures by Italy��s new government Monday �C meet new roadblocks.

S&P noted in a follow-up to Monday’s sweeping announcement that it has concerns that conditions have fundamentally changed for Euro zone sovereign issuers.

“Banks and portfolio investors alike have also started to require significantly higher risk premiums for an increasing number of eurozone sovereign issuers, including ‘AAA’-rated sovereigns,” the ratings agency said. While country-specific issues are at play, factors like a proposed 50% haircut on Greek debt that will not trigger payouts on credit default swaps is also a concern that may make prospective investors to question “their perceived utility as hedge vehicles.” (See “Why Europe May Regret Greek Haircuts.”)

With markets waiting to see what comes out of Europe, investors appear to be showing more of a preference for U.S. exposure of late. Aside from a 10-year Treasury yield that is still right around 2% (2.09% Tuesday morning), stocks with more of a U.S. slant were the better performers among a group of portfolios put together by Citigroup‘s research arm.

In a note Tuesday discussing the November performance of eight strategic baskets composed by the firm, chief U.S. equity strategist Tobias Levkovich notes that a basket of stocks with U.S.-centric sales — companies including AT&T, CVS Caremark and Target — was among three that outperformed the S&P 500. Meanwhile, an international sales-themed basket, w! hich inc ludes stocks like Hewlett-Packard, General Electric and Johnson & Johnson, underperformed, likely a reflection of the ongoing stress in Europe and fresh concerns about a slowdown of growth in China.