Why the eurozone downgrades matter
The downgrade by S&P of a whole string of eurozone countries should not in the short-term cause a sharp worsening in the currency union's financial crisis.
But it could reinforce the slow and painful decline of the eurozone and its sprawling banking system.
The point is that emergency protection was put in place before Christmas by the European Central Bank - which provided an unprecedented 489bn euros of three-year loans to eurozone banks, promised banks they could borrow as much more of this long-term money as they need in February, and added that banks could swap almost any asset they've got for additional euros.
Or to put it another way, the European Central Bank basically said that for a year or two, it doesn't matter whether eurozone banks find it impossible to borrow from commercial lenders in markets, because the central bank will lend what's needed.
The entire eurozone banking system can be seen to have been nationalised - or at least the funding of banks has been nationalised, even if their ownership hasn't been transferred to taxpayers.
There is a benign paradox here, pointed out to me by Morgan Stanley - which is that the decision of the ECB to in effect underwrite all eurozone banks means that stronger European banks (including British banks), such as those from the northern European economies, have been able to issue unsecured debt again (to an extent).
Proper private-sector funding markets have re-opened for a small number of banks from stronger economies.
So in the first few days of 2012, Swiss, German, Dutch , UK and Nordic banks sold €19bn of unsecured debt, compared with €18.4bn in the last six months of 2011.
Of course, it has been impossible for eurozone banks from the over-borrowed southern economies to borrow in this way.
But the ECB's rescue strategy has had a useful spin-off benefit for banks that are not on the critical list.
The point is that the ECB's largesse has - for a period at least - probably eliminated the worst thing that could happen as a result of the downgrade of an Italy, Spain or France, which is that a giant bank would find it much harder to borrow and would therefore collapse.
Bankers and regulators disagree on how much time has been bought by the ECB for a more fundamental solution to be found to the eurozone's problems.
One banker told me he thought no big bank would collapse this year. A regulator however feels the ECB has provided stability for just three months - and that a bank or banks could run out of collateral to pledge to the ECB in the second quarter of this year, and therefore topple over then
Anyway, the background to all this is that when the debt of an Italy or a France is downgraded, that hurts Italian and French banks in two ways. The value of their loans to their respective governments - the banks' holdings of the relevant sovereign debt - would be perceived to have fallen.
But perhaps more importantly the downgraded Italian and French governments would be seen to be less financially capable of bailing out Italian and French banks in a crisis, so other creditors would be shouldering more risk.
That's why sovereign downgrades can make it harder and more expensive for banks to borrow.
But for Italian and French banks, that's no longer the concern it was just a month ago, now that the ECB is the big provider of loans to banks.
Even so, that doesn't mean the downgrades will bring no pain to the eurozone. For the governments of France, Spain, Italy and so on, borrowing costs may go up.
Perhaps more importantly, and at the risk of repeating myself, the downgrades increase the dependence of the big banks on finance from the European Central Bank - and for the economic recovery of the eurozone, that's a very bad thing.
The less that banks are able to raise funds in a normal commercial way, the more they're dependent on a central bank, the more reluctant they are to lend to the wider economy - and given the massive dependence of the eurozone economy on finance provided by banks, that leads to a reduction of economic activity, a reinforcement of recessionary conditions.
Also, as worrying as the downgrades, in that context, has been the enormous difficulty that Italy's biggest bank, Unicredit, has been experiencing when raising new capital, the vital buffer against future losses.
The collapse in Unicredit's share price as it tried to raise €7.5bn in a rights issue means - bankers tell me - that the market for new equity capital is in effect shut for most eurozone banks.
But if banks can't raise capital, they have no choice but to shrink balance sheets and lend less.
That has a devastating impact on the eurozone's households and businesses, which are finding it harder to borrow what they need.
So even if the downgrades don't lead to default by a nation or a bank, they make it much harder for the banks - and in a way the whole eurozone - to get off life support.
The downgrades may not be lethal for the eurozone. But they keep the financial system and the economy in the sick bay.
That creates a damaging negative feedback loop (less lending means asset price falls, more bankruptcies, bigger losses for banks, and even less lending by capital-constrained banks) which makes it all the harder for the eurozone to break free of its cycle of decline.
And, as I said in my earlier note, the downgrades also make it harder for the eurozone to establish a proper circuit breaker - in the form of a giant bailout fund - to protect other sovereign creditors in the event that today's impasse in Greek debt talks lead to a Greek default.
All of which means that when eurozone leaders argue that the downgrades don't really matter, they may be indulging in wishful thinking.
The downgrades by Standard & Poors are more-or-less as bad as they could have been.
Of 16 eurozone countries under review, nine have been downgraded - including the currency union's second biggest economy, France - which, with Austria, has lost its cherished AAA rating.
And the debt of the Portuguese government has been downgraded to junk, putting it in the same broad category of financial outcast as Greece, and raising fears that Portugal could renege on what it owes.
Also S&P warns that there is a greater than one-in-three chance for 14 eurozone governments that they'll be downgraded again.
It's S&P's reasons for the downgrades that many will see as particularly worrying: the agency argues that government plans to fix the eurozone crisis are inadequate and actually risk making the crisis worse, by sending weaker economies, like Portugal's and Spain's, into potentially deep recessions.