European stocks dip over S&P warning on eurozone downgrades

European stocks fell sharply at opening after ratings agency Standard & Poor’s warned of a possible downgrade for most of the eurozone, including France and Germany. Frankfurt’s DAX dropped 1.4 per cent, London’s FTSE was down 0.72 per cent while Paris’CaAC 40 lost 0.95 per cent. 

The rating agency said overnight that 15 members of the 17-nation eurozone are on negative credit watch. Triple-A rated Germany, Austria, Finland, the Netherlands and Luxembourg and the double-A rated Belgium could be cut by one notch, while France and eight others with lower ratings could face a two-notch drop.

But French Foreign Minister Alain Juppe said the Franco-German plan announced on Monday by the leaders of the two countries was a response to the possible credit downgrades. He said he was surprised by the timing of the announcement of which a forewarning was given before the Franco-German agreement was announced,

He said Monday’s plan to toughen EU budgetary rules “is precisely the response to one of the major questions of this ratings agency”.

He added the deal will allow the eurozone to move forward at the next European Council in Brussels on Thursday and Friday.

Sarkozy and Merkel appeared united when they offered a new direction for the single currency zone on Monday.

The two backed automatic sanctions against an EU members state allowing its public deficit to go above three per cent of GDP.

All the new rules would be enshrined in a rewritten EU treaty signed by all 27 EU members or just the 17 eurozone members with the others signing on a voluntary basis.

Prior to the S&P warning, eurozone bonds had rallied strongly in the last three trading days on optimism that a change of strategy was on the cards and tough austerity measures introduced by Italy.