Nothing puts credit ratings agencies in a giving mood like Christmas.

Too bad they're handing out lumps of coal in the form of downgrades to financial guarantors and structured products tied to mortgage-backed securities. As so much bad news threatens more pain in the credit markets, investors are counting on rescuers to swoop in.

Moody's Investors Service, Fitch Ratings and Standard & Poor's were on a pre-Christmas warnings and downgrade spree in recent weeks, highlighting concerns about capital shortfalls for bond insurers, including the market's two largest,

MBIA

(MBI) - Get Report

and

Ambac Financial Group

( ABK).

Together, MBIA and Ambac insure $1.2 trillion of bonds, and they need capital to keep afloat next year.

The guarantors rely on pristine credit ratings and ample stores of capital to guarantee that investors receive payments on their securities. A downgrade could force some fixed-income investors into a selling spree, because parameters of their investment funds require that their holdings be insured by a guarantor with a triple-A rating.

James Bianco of Bianco Research notes that the municipal bond market has been slow to react to warnings about the guarantors. The market has also failed to take note that Fitch put 173,022 bond issues on credit watch for a downgrade, mostly municipal bonds. He says this could mean "another big leg down" for the credit markets.

Fitch Ratings late last week warned the guarantors they have four to six weeks to raise $1 billion before facing a possible downgrade. MBIA and Ambac have lost around 72% of their value from their pre-credit crunch highs this spring.

Traders will be on guard for more ratings bombshells in the upcoming holiday-shortened week. And they'll be watching to see if the guarantors can make any progress in shoring up the capital they require. MBIA earlier this month obtained $1 billion from private equity firm Warburg Pincus, but still needs another $1 billion to square up its capital base, says Fitch.

And, while technology stocks tried to spread holiday cheer last week, the real rescuers have been the investors around the world staking their claims on distressed U.S. companies, underscoring the helpfulness of excess liquidity and a weak dollar.

Several rescue fantasies came to fruition last week, and the market wants more. The question is whether these foreign investors will be frustrated by trying to call a bottom and failing. Foreign investments in

Citigroup

(C) - Get Report

,

Blackstone

(BX) - Get Report

and

Bear Stearns

( BSC) have thus far failed to yield any positive returns.

Maybe this week's capital injections will fare better.

Goldman Sachs

(GS) - Get Report

bought a stake in student loan company

First Marblehead

(FMD)

, sending its shares up more than 66%.

After learning Thursday that

Merrill Lynch

( MER) may be taking more writedowns, investors pushed the firm's stock up nearly 2% Friday on news the company is in talks to obtain a

$5 billion capital injection from Singapore's sovereign investment company Temasek.

Morgan Stanley

(MS) - Get Report

announced another $9.4 billion in writedowns for the fourth quarter, but received its $5 billion from China Investment Corp.

If foreign bargain hunters take the week off next week, the markets will be watching the

Federal Reserve

for relief in the still-tight money markets.

The Fed's first two $20 billion liquidity injections via its new Term Auction Facility were met with strong demand last week. Traders may remain somewhat reassured that the Fed will

keep pumping the system with cash. On Friday morning, the Fed announced it will "conduct biweekly Term Auction Facility auctions for as long as necessary to address elevated pressures in short-term funding markets." Sizes of the Jan. 14 and 28 auctions will be revealed at noon on Jan. 4, according to the Fed's statement.

Next week is relatively thin on economic data, with reports on durable goods orders, consumer confidence and new home sales released on Thursday and Friday. Earnings reports are likewise scarce next week, giving traders a respite ahead of January's deluge.

Whatever happens, it's not likely going to be your typical Christmas week for the markets this year.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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