January 2012 saw an unexpected bombshell when the rating agency Standard & Poor announced that it was downgrading the credit rating of nine European countries.
France were the most high profile victims when it was announced that they were losing their triple ‘A’ status and both Spain and Italy were demoted two places and Portugal joined Greece when their debt was given “junk” status.
This did not come completely unexpectedly however as Standard & Poor had given some advanced indication that they were going to have no choice but to take this action if things did not improve.
You may remember that Standard and Poor had already downgraded the debt of the United States during the summer of 2011 which meant that for the first time in its history, the United States had become a borrower of less than triple ‘A’ status. This brought heavy criticism from various places of Standard and Poor as well as a federal investigation. Although the action taken does not seem to have affected the marketplace, with the United States still having the world’s largest economy.
The French did not particularly like the idea of their triple ‘A’ credit rating being downgraded as this was something of a matter of national pride. With their president Nicola Sarkozy in the firing line during a time when he is facing a challenge to his leadership from the Socialist party and this failure is bound to be seized upon by the opposition.
There was a concerted effort by Sarkozy’s supporters to play down the significance of the action taken to downgrade their triple ‘A’ status by Standard & Poor.
The debt crisis in Europe is now two years old and because of no noticeable improvement or progress being made Standard & Poor have pointed out in their report that comes with their new ratings. If one of the EU members default or there is another recession then this could have a knock-on affect across the world especially in the United States, which is one of the major traders of the European Union. These banking systems are all inter connected and all the banks and financial companies could take a severe hit by events such as a default or a recession.
There are going to be a lot more twists and turns in the next few months as the financial markets of the world try to recover from one of the worst financial crises in the past one hundred years.
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