Surprising markets at the close, global credit agency Standard and Poor’s announced that it was downgrading – not 1, not 2, but 34 of  - Italy’s financial services firms.  Most of the downgrades were a simple one notch decline, and comes on the heels of last month’s downgrade of Italy’s sovereign credit rating by the credit agency.

Given that the overall economy was downgraded a notch, it’s no wonder that major financial firms – including major bulge bracket firms like UniCredit SpA and Intesa SpA – were given the negative reduction just one month later.  Analysts at the credit agency noted that given Italy’s “high external public debt” and its “vulnerability to external financing risks had increased”, the country’s banks were likely unable to “rollover their wholesale debt.”  This increase in cost at the financing level would likely add to already smaller profit margins in the near term – negatively affecting profitability in the short term.

Now, the big question is whether or not this is likely to affect the euro at the open.

And the answer is likely so.  Although the anticipated decline may not be as serious as one might think.  Up to now the focus has been on Greek debt talks – and to a lesser degree Portugal’s problems.  So, it’s natural that Italian bank downgrades will likely spur some selling at the open for the Euro.  However, with the market already digesting Italy’s sovereign that came in the beginning of January, the recent news is likely just a followup – and may not necessarily be indicative of any further trouble.  This realization could limit the decline in the single currency – rather than spark a massive selloff at Sunday’s open.

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