IMF: Sovereign ratings increase instability in Europe

The recent announcements concerning the ratings cut for some of the European countries will have significant indirect effects on the region, as they could affect its financial stability, according to an analysis by the International Monetary Fund (FMI).

The study was published immediately after on Tuesday night, ratings agency "Standard & Poor"s" cut the ratings of Greece and Portugal, for fear that the two countries would restructure their debt after 2013.

In the case of Greece, its rating - which is already at "junk" (nor recommend for investments), was cut by two levels, from "BB+" to "BB-", with a negative outlook. Portugal"s rating was cut one level, to "BBB-", the last level which is equal to an investment recommendation.

The ratings cut for several economies which are considered "relatively big" (such as Greece) had an impact on other countries in the Eurozone, the IMF study notes.

Rabah Arezki and Amadou S.R. Sy, the authors of the study, state that the ratings cut put additional strain on the CDS, bonds and stock markets.

The study emphasizes: "Interestingly, the financial markets in the entire Eurozone have been subjected to pressure, even though the actions of the ratings agencies concerning sovereign ratings only concerned a few countries: Greec, Iceland, Ireland, Portugal and Ireland".

The IMF study reviewed 71 ratings announcements made by S&P, "Moody"s Investors Service" and "Fitch Ratings" between October 2006 and April 2010.

European officials have criticized the ratings agencies for cutting ratings at a moment when the sovereign debt crisis in Europe was spreading, aggravating the turmoil in the markets. In this context, the European Commission announced that by September, it would propose stricter regulation of rating agencies.