LONDON—Standard & Poor's has notified European governments that it is about to announce downgrades in the credit ratings of France and a number of European sovereigns as early as Friday, said two people familiar with the matter.
One of the people said an S&P notice is being circulated among euro-zone governments and that an announcement "could be imminent." S&P declined to comment.
In December, the ratings firm placed 15 of the 17 euro-zone countries on watch for possible downgrade, citing new systemic stresses that are pressuring the euro zone's credit standing as a whole.
Talk that S&P is on the brink of downgrading several European countries pushed the euro to a fresh session low against the dollar in Friday trading in New York. The common currency dropped as low as $1.2662, down from $1.2814 late Thursday.
The biggest question for financial markets is whether France will lose its triple-A rating after showing signs of fiscal slippage during its economic slowdown over the past year.
A downgrade of France's rating will, indirectly, raise the cost of borrowing for the European Financial Stability Facility, whose own rating depends largely on the credit quality of the countries that back it. The EFSF, which has also been placed on negative credit watch by the S&P, would then have to pass on those higher borrowing costs to countries such as Ireland and Portugal, making it even harder for them to reduce their budget deficits as planned.
The downgrades would also be a blow to Italy, which had seen a decline in its bond yields in recent sessions. The euro zone's third-largest economy is scheduled to sell €440 billion ($563.8 billion) of bonds and treasury bills in 2012 and investors are expected to demand higher yields for the risk of holding a lower-rated security.
The S&P's negative ratings watch included top-rated Germany, France, the Netherlands, Austria, Finland and Luxembourg—countries that S&P said could lose their premier credit status if European policy makers continue stumbling in efforts to tackle the immediate market confidence crisis. S&P also pointed to markedly higher risk premiums on a growing number of euro-zone sovereigns, including some rated triple-A.
Germany, which also has a triple-A credit rating, isn't expected to be among the downgrades.
Greece and Cyprus were the only two euro-zone sovereigns not affected by S&P's latest action. Cyprus had already been placed on negative watch, and Greece's status remained unchanged because its double-C rating already connotes a relatively high near-term probability of default.
Fitch Ratings, which has placed six euro-zone countries on negative ratings watch, has said it expects to complete its review by the end of January.
Bond yields of indebted euro-zone states reversed earlier falls and moved sharply higher on the news.
The Italian 10-year yield added 0.2 percentage points to trade at 6.75% after having made a low of 6.46% Friday, according to data from Tradeweb.
Spanish yields joined in the bearish move with the 10-year adding 0.18 percentage points to trade at 5.21% after having traded as low as 5% Friday.
France wasn't immune from the bearish sentiment with the 10-year bond yield rising by 0.07 percentage points to 3.03%.
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(online.WSJ.com)
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