by Richard Barley
Wall Street Journal
January 13, 2012
Friday 13th looks set to be more than just unlucky for the euro zone. A flood of leaks suggest that Standard & Poor’s is about to unveil its long-awaited decision on European government ratings. S&P in December said it was considering cutting 16 euro-zone nations’ ratings, largely because of the failure to stem the crisis so far. Here are some of the key things to look out for in S&P’s deliberations.
First, who is and isn’t downgraded will be crucial. If Germany keeps its triple-A while France is downgraded, that could increase tensions in the bond market by further enshrining Bunds as the only safe-haven asset in the euro zone. It will also have a knock-on impact on related ratings that depend on support from triple-A states, such as the European Financial Stability Facility. But that may not spell disaster: the EFSF issued a bond just last week to investors who will have been well aware of the likelihood of a downgrade.
Second, the outlooks attached to the ratings will set the tone for trading. The best outcome would be that countries emerge with stable outlooks, but given the uncertainty over the euro zone, that may be too much to hope for. Negative outlooks — or worse, continued negative watches which imply further near-term downgrades — will weigh on investor appetite.
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