Standard And Poor's European Vacation

It's a European vacation alright, as in nine European countries had to vacate their credit ratings as S&P downgraded the lot of them.  The big loser:  France, losing its AAA rating by one notch to AA+, and Italy and Spain taking two steps down the road to austerity oblivion as the plan to save Greece is starting to fall apart.

"Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone," the U.S.-based ratings agency said in a statement.

In a potentially more ominous setback, negotiations on a debt swap by private creditors seen as crucial to avert a Greek default that would rock Europe and the world economy broke up without agreement in Athens, although officials said more talks are likely next week.

If Greece cannot persuade banks and insurers to accept voluntary losses on their bond holdings, a second international rescue package for the euro zone's most heavily indebted state will unravel, raising the prospect of bankruptcy in late March, when it has to redeem 14.4 billion euros in maturing debt.

S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each.

The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status.

It put 14 euro zone states on negative outlook for a possible further downgrade, including France, Austria, and still triple-A rated Finland, the Netherlands and Luxembourg.

Germany was the only country to emerge totally unscathed with its triple-A rating and a stable outlook.

A couple of observations:

1)  Forget France.  Germany is now basically solely in charge of the EU's financial picture, whereas the two countries were partners before.  No longer.  What Merkel says, goes.  It was unofficial before.  It's official now.

2)  Portugal's junk status is bad news for the entire eurozone, but that was coming anyway.  Steep austerity measures did not save Portugal's economy from the landfill.  In fact, it didn't save any of the EU countries from downgrade, even though they all instituted serious spending cuts.  We were told austerity was necessary to prevent further deterioration of these economies.  Guess what?  It made things worse. Italy and Spain are now hanging by a thread.  Not pretty.

3)  Greece?  Greece is now officially in the "Oh crap" stage.  If the talks between Greece and its creditors fail before the deadline of its next bailout payment, the game's over.  Greece is in serious trouble at this point, and the writing's on the wall.  It's going to have to take an ugly deal...and so will its creditors.  Soon.

4)  S&P goes on to say there's a 40% chance of a recession in Europe in 2012.  I put it higher than that, maybe 75%, personally.  The austerity is failing miserably.  Who will bail Europe out?

It's going to get a lot worse over there.