A RATINGS downgrade of nine European economies including France is set to to drag the Australian market lower at the open today, reinforcing fears that the crisis in the euro zone is alive and well.
But the fall on the local bourse is expected to be moderated by the fact that Standard & Poor's decision to lower the European nations' credit ratings on Friday was largely anticipated by investors.
Futures markets yesterday picked the benchmark S&P 200 index to fall 17 points to 4163 in early trading today, although some observers believe the market could drop as much as 40 points. Wall Street posted a mild fall on Friday after speculation of S&P's reappraisal of the European economies' creditworthiness.
In downgrading nine countries, S&P warned that there was a 40 per cent chance of a recession in the euro zone, which could shrink by 1.5 per cent this year. The downgrades have also reinforced Australia's relative health given it is one of just a handful of countries, including Germany, to retain a triple-A credit rating.
The Prime Minister, Julia Gillard, used the downgrades as a chance to call for European leaders to "swiftly undertake structural reforms to boost their economic potential and lift growth".
While Europe had avoided a full-blown meltdown of the magnitude of the 2008 global financial crisis, AMP Capital Investors' chief economist, Shane Oliver, said the debt-laden euro zone would "just continue to muddle along" and be a "brake on the local Australian economy for the next year or so".
"It is telling us that the European crisis is alive and well. The fiscal austerity has the effect of worsening the economic outlook," he said yesterday. He said the downgrade should be anticipated by Australian investors, but nevertheless it would be a bit weaker at the open.
However, investors are likely to be rattled by renewed concerns about Greece after a breakdown in talks between the Greek government and creditor banks on Friday.
Will Seddon, a portfolio manager at White Funds Management, said investors were also concerned about the longevity of mild improvements in the US economy given the precarious state of the euro zone.
Downgrades put Athens in firing line