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By David Berman

Despite a positive backdrop in Europe – where Germany and France have agreed on a way to better integrate the European economy and Italy announced new austerity plans – Standard & Poor’s looks set to interrupt the party.

According to The Financial Times, the credit rating agency will announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland and Luxembourg on “creditwatch negative.” The big surprise here is that these nations are the region's fiscal winners.

That means there is a chance that Germany and other top-rated countries could see their credit ratings taken down a notch within 90 days, to AA+ from triple-A. The reason for the warning? The Times quoted S&P as saying that with Germany it is concerned about “the potential impact (...) of what we view as deepening political, financial, and monetary problems with the European economic and monetary union.”

In other words, there are contagion fears at work here. As the Times noted, “Markets have been braced for a potential downgrade of France but few expected Germany’s top rating to be called into question.”

Stocks were having some problems holding onto their gains in mid-afternoon trading, with the S&P 500 surrendering about half its earlier gains. It recently traded at 1257, up 1 per cent. It had traded as high as nearly 1267 earlier in the day, as tumbling European government bond yields reflected renewed optimism that policy-makers are moving toward a solution to the sovereign-debt crisis.

The yield on the 10-year Italian bond fell to 5.93 per cent, down 0.71 percentage points – marking its biggest drop in nearly four months. Spanish and French government bond yields also retreated.

Source: Will Germany Get Downgraded?