6.12.2011

By Simon Miller

Standard & Poor’s has placed the European bailout scheme on a credit watch following its warning of a downgrade for almost all eurozone countries.

The decision to place the European Financial Stability Facility (EFSF) on a CreditWatch negative meant that future fuding could become more expensive if it gets downgraded.

In a statement, S&P commented: "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," said S&P in a statement.

Last night, the ratings agency said that 15 members of the eurozone have been placed on CreditWatch with negative implications.

S&P said the action had been taken because systemic stresses had risen in recent weeks “to the extent that they now put downward pressure on the credit standing of the eurozone as a whole”.

It added that the systemic stresses came from tightening credit conditions; markedly high risk premiums; continued political disagreement on how to tackle the crisis; large levels of government and household debt; and the rising risk of an economic recession next year.

“Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40% probability of a fall in output for the eurozone as a whole,” S&P said.

The rating agency will conclude its review of the eurozone as soon as possible after the EU summit scheduled for 8 December and 9 December.

It added that “depending on the score changes, if any, that our rating committees agree are appropriate for each sovereign, we believe that ratings could be lowered by up to one notch for Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg, and by up to two notches for the other governments”.

A decision on EFSF's CreditWatch placement will bne made within 90 days and, if possible sooner, after S&P completes its review of EFSF guarantor members currently rated 'AAA'.