The credit rating agency, Standard & Poor warned that it may perform an unprecedented mass downgrade on the credit ratings of euro zone countries if EU leaders fail to reach an agreement on how to solve the impending debt crisis in a summit this week. S&P has placed the ratings of 15 euro zone countries on credit watch negative-including those of top-rated Germany and France, the zone’s biggest economies- and said ‘systemic stresses’ are building up as credit conditions tighten in the 17-nation region.

A credit watch negative typically signals a possible downgrade in no more than three months. S&P said it expects to conclude its review as soon as possible following a crucial summit of EU leaders on Friday. S&P had confirmed in a statement stating that the systemic stresses in the zone have risen in the recent weeks to the extent that they now put downgrade pressure on the credit standard of the euro zone as a whole. If a downgrade does occur, countries including Germany, Austria, Belgium, Finland, Netherlands and Luxembourg would likely see its ratings cuts of one notch. The other nine countries could suffer downgrades of up to two notches, S&P affirmed. S&P has Cyprus on credit watch negative while Greece is rated CC which already indicates high possibility of default in the long term.

The German Chancellor and her French counterpart responded to the S&P warning by saying they were united in their determination to do everything necessary to secure the stability of the euro zone. Other investors saw S&P’s warning on the euro zone consistent with its decision to strip the United States from its AAA rating in August. With many investors insisting a greater role for the ECB in the solution of the crisis, S&P will also review the ECB’s monetary flexibility to address the situation. Hopes that the EU leaders will come up with a comprehensive plan to tackle the crisis still support market sentiments. However, the other two rating agencies have already proclaimed they could soon review the rating of core euro zone countries, but they still have maintained a stable outlook on top-rated euro zone countries.

This week’s EU summit is becoming critical as the time draws nearer to D-day. It’s of paramount importance that the leaders chalk out a plan for solving the debt crisis. If not, the Euro zone and consequently the world could face drastic repercussions of magnified proportions. All we can do at the moment is hope for the best!