Euro-zone policies have fallen short: S&P

CHICAGO (MarketWatch) � Standard & Poor�s credit analysts said Saturday that Euro-zone policy makers have failed to address the �broadening and deepening� financial crisis the region now faces, leading the agency to issue long-term downgrades on nine countries, including Cyprus, Italy, Portugal, Spain, Austria, France, Malta, Slovakia and Slovenia.

Click to Play S&P downgrades euro zone nations

Countries react to the "Black Friday" announcement of nine credit rating downgrades in the euro zone by Standard & Poor's agency. Video: Reuters/Photo: AP

Perhaps most notably among the cuts late Friday, S&P downgraded France and Austria to AA+ from AAA, leaving only Germany, Netherlands, Finland and Luxembourg left as AAA-rated countries in the currency group. Portugal and Cyprus were downgraded to junk-bond status.

During a conference call Saturday morning, S&P credit analyst Moritz Kraemer said policymakers have yet to come up with solutions to the �systemic stresses� that plague Euro-zone nations during its debt crisis.

Among these problems, he said, are tightening credit conditions; weakening prospects for economic growth in the region; and continued disagreement among government officials over how the situation should be addressed.

In a Saturday research note, UBS advised clients to short the Euro, as Friday�s downgrades �are not fully priced yet despite the euro falling to new sixteen month lows around 1.2625.�

In an EU summit on Dec. 9, the 17 Euro-zone nations pledged to maintain closer financial ties through an inter-governmental accord. Among other stipulations, the pact includes a rule that annual structural deficits should not exceed 0.5% of nominal gross domestic product. This rule will be introduced in nations� constitutions and the European Court of Justice will verify compliance. There will also be automatic sanctions for countries whose deficit exceeds 3% of GDP unless a qualified majority of euro-area members is opposed. Great Britain opposed the treaty, and will not participate.

Kraemer said on Saturday�s call that the agreement places too much emphasis on deficits, and the implementation of such rules would not have averted the financial crisis had they been in effect earlier. �Spain had balanced budgets for most of the first 10 years of the Euro�s existence,� he pointed out, �while Germany had one of the biggest deficits.� Today, however, Germany�s financial stability is much greater than Spain�s.

However, the analyst also acknowledged that the Euro-zone�s credit worthiness is still relatively high. S&P only rates three of the region�s sovereigns below investment-grade level � Greece, Portugal and Cyprus.

Kraemer said that Greek bondholders could recover perhaps 30 to 50 cents per euro, but whatever the amount, Greece will go into default, as measured by the standards of S&P. The big risk, the analyst added, is that of a �disorderly� default by Greece, one that could rock markets around the world and create tougher credit conditions for other countries trying to roll over existing debt.

Kraemer noted that global markets have taken a far more �gloomy� view of the Euro-zone�s prospects than has S&P.