Standard & Poor's warned that it could cut the credit ratings of the European Union and large eurozone banks if a mass downgrade of eurozone countries materializes.
S&P said on Monday it may downgrade nearly all 17 eurozone countries if EU leaders fail to agree on a solution for the region's debt crisis during Friday's summit.
The potential downgrade of the European Union has no impact on the ratings of other EU countries that are not part of the eurozone, a spokesman for S&P said. However, the move would likely increase the EU's borrowing costs, making it more costly for it to fund financial aid programs for member states.
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S&P placed the European Union's AAA credit rating on credit watch negative, noting that eurozone members, or countries that are part of the region's monetary union, contributed about 62 percent of the EU's total budgeted revenues in 2011.
"Our review will focus on the financial ability of eurozone member states to support the EU's debt service should the institution face a period of financial distress," S&P analysts Frank Gil and Moritz Kraemer said in a report.
If eurozone countries are downgraded, the European Union could have its rating cut by one notch, they added.
The European Union and the European Atomic Energy Community borrow on capital markets under a joint program to issue up to 80 billion euros ($107.13 billion) in medium-term notes in order to finance member states through various channels.
In another follow-up to its warning on Monday, S&P said some of the eurozone's largest banks, such as BNP Paribas and Deutsche Bank, could have their ratings cut following a potential downgrade of eurozone countries.
S&P's downgrade warnings for key eurozone countries has increased pressure on policymakers to find a solution to the debt crisis quickly.
The move drew strong criticism from eurozone governments, which accuse the agencies of unduly inserting themselves into the political process. But many market participants welcomed the move, saying that by signaling more clearly their possible actions, ratings agencies are reducing market uncertainty.
"(The agencies) became activist and they became proactive," said Enrique Alvarez, head of strategy at IDEAglobal in New York. "In past crises, I don't think that ratings agencies were willing to telegraph as much information as they are now to the markets.
"This is very favorable for market transparency and it's very favorable overall to investors because there will be no shock next week if European policymakers don't come up with something valuable this weekend," added Alvarez.
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