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TheStreet Open House

Standard & Poor's Baffles the World With the Worst Timing Ever

Stocks in this article: MHPMCO^DJI^GSPC

BOSTON ( TheStreet) -- Standard & Poor's, struggling to gain credibility after failing to warn the world of the subprime meltdown in 2008, downgraded U.S. debt this summer. It failed. Now it's trying again with Europe.

Standard & Poor's, a unit of McGraw-Hill Cos. (MHP), late Monday put Germany, France and 13 other eurozone members on "credit watch with negative implications," meaning a debt downgrade for each may come soon. The credit-rating agency today warned that the European Financial Stability Facility, the bailout fund that some consider the white knight to the debt crisis, could also lose its triple-A rating.

S&P's decision to warn countries like Germany and France comes a few days before an important European Union meeting to solve a crisis that's dragged down the euro and threatened to split apart the currency union for more than a year. It's an encore performance for Standard & Poor's, which cut the U.S.'s debt rating in the middle of the debt-ceiling debate over the summer, a decision aimed at shoring up credibility that ended up irking investors, politicians and even average Americans.

BBC News business editor Robert Peston called the European downgrade warning "logical but tactless," adding:

It comes just as France and Germany reach an agreement intended to subject all eurozone countries to stricter disciplines on what they borrow -- and only days before a European Union summit that's intended to come up with a proper solution to the eurozone's crisis.

Jeffrey Sica, president and chief investment officer of Sica Wealth Management, a company in Morristown, N.J., with about $1 billion in assets under management, says the timing of Standard & Poor's decision "makes no sense."

"One of the most baffling elements of this anticipated resolution for the credit in Europe is that it took them so long," he says. "After downgrading our rating in the U.S., the fact they kept the ratings in Europe the way they have is really shocking."

Standard & Poor's "is again injecting itself into the political process," as Bloomberg put it this morning, referring to S&P's decision to downgrade the U.S. triple-A rating to AA+ in August during the debt-ceiling negotiations.

"They don't want to be embarrassed again," Sica says, referring to how credit-rating agencies like Standard & Poor's, Moody's (MCO) and Fitch Ratings were chastised for their role in exacerbating the financial crisis in 2008 by being too slow to downgrade the triple-A rating on securities that were far riskier than they appeared. The warnings last night on European countries and this morning on the European Financial Stability Facility rescue fund is a move to save face, Sica says.

"They're hedging themselves," Sica continues. "They have to analyze data and come up with their ratings, yet they seem to place these ratings and downgrades at points to enhance their credibility and can have an 'I told you so' moment."

U.S. investors are expecting the worst for Europe, shrugging off news of the potential downgrades. The Dow Jones Industrial Average is rising for a fifth day, and the S&P 500 also is up.

Still, if no European country had a triple-A rating, Europe would suffer from higher borrowing costs and a tarnished reputation, further sinking fragile economies and pulling down America in the process.

"We're looking at a rally that is not able to sustain itself," Sica says. "It's shown the ability of investors to ignore macroeconomic issues."

-- Written by Robert Holmes in Boston.



>To contact the writer of this article, click here: Robert Holmes.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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