Rating Agency Warnings Bring Down the Markets

PARIS — The market euphoria over last week’s deal by European leaders to shore up the euro currency union succumbed to a darker mood Monday.

In European trading and on Wall Street, stocks fell sharply after Moody’s Investors Service and the Fitch Ratings agency warned that political efforts to protect the euro had not resolved the immediate dangers of a significant economic downturn in the region and troubles in the banking system.

And the yield, or interest rate, on the 10-year Italian government bond — perhaps the most crucial barometer of the euro crisis — rose to 6.5 percent, heading back into a range that could make it hard for Italy to pay off its staggering debts.

Also pulling down stocks, the chip maker Intel said before trading began in New York that its fourth-quarter revenue would be lower than expected because of supply shortages of hard disk drives, as a result of flood damage to factories in Thailand. Intel now expects fourth-quarter revenue of $13.4 billion to $14 billion, down from a previous forecast of $14.2 billion to $15.2 billion.

Shares of Intel, a component of the Dow, lost 4 percent, to close at $24.

Hank Smith, the chief investment officer for Haverford Trust, said the combination of the Intel announcement and downbeat reassessments of the European summit meeting were too much for investors to digest.

“All of that just breeds uncertainty and I think you are just seeing that reflected in the market,” he said.

Fitch warned Monday that European politicians were taking a “gradualist” approach to creating a true fiscal union among the 17 euro zone member nations — a protracted effort that Fitch said would impose additional economic and financial burdens on the region. “It means the crisis will continue at varying levels of intensity throughout 2012 and probably beyond,” the agency said.

Moody’s said it was putting the sovereign ratings of European Union countries on review for a possible downgrade in the coming months. Standard & Poor’s issued a similar warning last week, saying it could lower the sterling credit ratings of Germany and France and cut other countries’ credit scores as Europe headed into a probable recession next year.

Cuts in credit ratings for crucial euro zone countries could play havoc with financing European bailout plans.

In United States, the Standard & Poor’s 500-stock index was down 1.49 percent, or 18.72 points, to 1,236.47. The Dow Jones industrial average fell 1.34 percent, or 162.87 points, to 12,021.39. The Nasdaq composite index lost 1.31 percent, or 34.59 points, to 2,612.26.

American financial stocks as a group were off more than 3 percent, dragged down by Morgan Stanley’s 6 percent plunge, to $15.38, and Citigroup’s 5 percent drop, to $27.22.

The Treasury’s benchmark 10-year note rose 13/32, to 99 27/32, and the yield fell to 2.02 percent from 2.06 percent late Friday.

In Europe, the Euro Stoxx 50, a barometer of euro zone blue chips, closed down 3.1 percent, while the FTSE 100 in London fell 1.8 percent. The DAX in Frankfurt lost 3.4 percent and the CAC in Paris fell 2.6 percent.

President Nicolas Sarkozy of France acknowledged Monday that a loss of the nation’s triple-A rating could come soon, but said it would not pose an “insurmountable” difficulty. Mr. Sarkozy has made it a priority of his coming presidential campaign to keep the country’s top credit rating, and repeated a pledge to reduce the nation’s debt and deficit without cutting wages and pensions.

Mr. Sarkozy’s rival, the Socialist candidate François Hollande, said Monday that he would try to renegotiate the terms of the European deal struck Friday if he were elected president in May, saying the pact would stifle growth.

With markets and rating agencies expressing disappointment with last week’s Brussels deal, the spotlight returned to the European Central Bank, the only institution with overall responsibility for maintaining the health and integrity of the euro.

Amid last week’s political theater, the central bank took a crucial step to help the biggest European commercial banks by agreeing to provide them with unlimited funds for up to three years.

While that may ease the pressure on the financial system, any further downgrade in the credit rating of European governments could escalate the crisis by making it more expensive for the weakest countries to service their debts. It could also make it more difficult for banks in Italy, Spain and even France to get credit from other banks, causing a potential pullback in lending to consumers and businesses at a time when economic growth is already being squeezed.

“No one has talked about what the euro zone’s growth strategy is, but economic growth is what does most of the eroding of debt,” said Richard Batty, an investment strategist at Standard Life Investments in Edinburgh.

Carl B. Weinberg, the chief economist at High Frequency Economics, said some European banks, which had already been selling assets to keep enough money on hand, were now also cutting back on lending. “A contraction of credit has already begun and will get worse,” he said.

Many governments and investors still cling to hope that the central bank will ride to the rescue by buying the bonds of troubled governments in Italy and Spain, in an effort to keep their borrowing costs from rising to levels that forced Greece, Ireland and Portugal to take international bailouts.

But Germany has opposed the move as being outside the bank’s mandate. Mario Draghi, the central bank president, made clear last week that the central bank was loath to take such steps.

Keeping the heat on Italy, Spain and Portugal to limit their borrowing, the central bank last week reduced its bond purchases of government debt, according to data disclosed Monday. The bank spent 635 million euros ($850 million) buying bonds on the open market, down from 3.7 billion euros the previous week.

Bond trading is typically thin in December, so the central bank probably saw less need to intervene.

Still, the total since the European Central Bank began buying government bonds last year stands at 207.5 billion euros — only about a tenth of what the United States Federal Reserve has spent as part of its effort to bolster American growth by adding to the money supply.

Moody’s warned Monday that the longer policy makers took an incremental approach to the crisis, “the greater the likelihood of more severe scenarios, including those involving multiple defaults by euro area countries and those additionally involving exits from the euro area.”

In Brussels, one potential legal snag arose Monday with the fiscal compact that most European Union members agreed to last week. The agreement calls for tightening the enforcement rules against countries that exceed budget deficit limits of 3 percent of gross domestic product.

Fully initiating that plan, however, might require changes to the European Union’s governing treaty, which would require parliamentary approvals beyond the scope of the deal reached in Brussels last week, according to European officials who were not authorized to speak publicly.

But Olli Rehn, European commissioner for economic and monetary affairs, said that most of the changes could be enforced.

“The results of this summit are better than first meets the eye,” he said, adding that people “should not underestimate its potential to fundamentally change the landscape of fiscal and economic policy making in Europe.”