Investors were bracing for a possible mass downgrade of euro zone countries as soon as this week after EU leaders failed to come up with decisive measures to tackle the region's debt crisis.
Moody's Investors Service said on Monday it intends to review the ratings of all 27 members of the European Union in the first quarter of 2012 after EU leaders offered few new measures to resolve the crisis in a summit on Friday.
Fitch Ratings said the summit, in which leaders agreed to draft a new treaty for deeper economic integration, failed to provide a comprehensive solution to the crisis, thus increasing short-term pressure on euro zone sovereign ratings.
Friday's historic agreement in Brussels between 26 European Union leaders to draft a new treaty for deeper integration in the euro zone gave a brief fillip to markets. But it did not last long as the announcements from both Moody's and Fitch compounded the selling in the fragile and increasingly illiquid pre-holiday market environment.
Standard & Poor's, which warned last week of a possible downgrade of 15 euro zone countries shortly after the summit, still has to announce its decision.
By placing these countries on credit watch negative -- which signals a possible imminent downgrade -- S&P said systemic stresses were building up as credit conditions tightened in the 17-nation region.
On Monday, S&P's chief economist Jean-Michel Six said time was running out for the currency bloc to resolve its debt problems.
There is probably yet another shock required before everybody in the euro zone reads from the same page, for instance a major German bank experiencing some real difficulties on the markets, which is a genuine possibility in the near term, Six told a business conference in Tel Aviv.
The agency, which in August stripped the United States of its AAA rating, said it would focus its decision on political dynamics that appear to be limiting the effectiveness of efforts to resolve the market confidence crisis.
The assessment of the summit's success by rival ratings agencies does not bode well for S&P's upcoming decision.
Moody's said the outcome of the EU summit did not change its view that risks to the cohesion of the euro area continue to rise.
As we announced in November, unless credit market conditions stabilize in the near future, our ratings of all EU sovereigns will need to be revisited, it said in a weekly report. We continue to expect to complete such a repositioning during the first quarter of 2012.
Fitch also said the summit did little to ease the pressure on euro zone sovereign debt, as leaders agreed on a gradualist approach that imposes additional economic and financial costs compared with an immediate comprehensive solution.
It means the crisis will continue at varying levels of intensity throughout 2012 and probably beyond, until the region is able to sustain a broad economic recovery, Fitch said.
The firm reiterated its belief that the European Central Bank is the only truly credible 'firewall' against liquidity and even solvency crises in Europe.
That firewall is created by either the use of the ECB's existing sovereign bond purchase program or indirectly by allowing the European Financial Stability Facility (EFSF), or its successor the European Stability Mechanism (ESM), access to its balance sheet, Fitch said in its statement.
Either method would mimic the U.S. Federal Reserve's actions to expand its balance sheet to ensure adequate ability to borrow and lend, ie: liquidity, in the banking system.
EU leaders agreed to lend up to 200 billion euros to the International Monetary Fund to help it aid euro zone strugglers and to bring forward the transition of the EFSF into the ESM as the permanent rescue fund by mid-2012 instead of 2013.
Hopes that the ECB would step up its actions in support of its sovereign shareholders as a quid pro quo for institutional and legal changes that gave the ECB greater confidence in the long-run commitment of eurozone governments to fiscal discipline appear to have been misplaced, Fitch said.
After Fitch's statement the euro dropped and remains near its lows for the day against the U.S. dollar. Already weaker through the morning trading hours, U.S. stocks lurched lower still and held at their session lows.
(Reporting by Walter Brandimarte and Daniel Bases; Additional reporting by Tova Cohen and Maayan Lubell in Tel Aviv; Editing by Padraic Cassidy)