The Australian and New Zealand dollars fell in value after the news as both transtasman currencies are seen as risky investments given their high rate of return.
Any sign of trouble in larger economies drives investors to pull their money out of Australia and New Zealand and put it back into cash in their own currencies.
S&P said in a statement that in its view, the policy initiatives taken by European policy-makers in recent weeks might be insufficient to fully address ongoing systemic stresses in the euro zone. The outlook for all but two of the 16 euro zone governments was negative, the rating agency said.
"In our view, these stresses include tightening credit conditions, an increase in risk premiums for a widening group of euro zone issuers, a simultaneous attempt to deleverage by governments and households, weakening economic growth prospects and an open and prolonged dispute among European policymakers over the proper approach to address challenges."
Possibly the biggest surprise was the decision by S&P to take away from France the gold-plated AAA rating which President Nicolas Sarkozy had worn as a badge of honour.
France and Germany are the key countries to drive the rebuilding of the euro zone economic wealth but France will struggle to provide its support as it now finds itself paying higher interest rates for sovereign debt. French banks are exposed to the debt mountains in Greece, Italy and Spain. S&P warned that France was at risk of further rating cuts if a recession further inflated its debt and budget deficit.
One of the positive effects for New Zealand could be the interest returning in the country's listed companies. They provide returns well above those provided by banks. They have good cash flow and are well capitalised.
During the weekend, European leaders promised to speed up their plans to strengthen spending rules and get a permanent bail-out fund established as soon as possible.
S&P said it was of the view that that refinancing costs for some countries might remain elevated and credit availability and economic growth might further slow. Pressure on financing conditions might persist, the rating agencies said.
Subsequently, long-standing frustration with ratings agencies echoed across Europe.
While Germany and France downplayed the decision, saying it was expected, Spain's finance minister was more alarmed.
"The downgrade is far too broad, it effects too many countries, it effects the very credibility of the euro," Cristobal Montoro said.
"It's important that the European institutions understand that it's time to do everything possible to build and reinforce the euro," Montoro, whose highly indebted country has the highest unemployment level in the euro zone, said.
Meanwhile, in a move to circumvent their influence, German Chancellor Angela Merkel backed a proposal to reduce the reliance of institutional investors on ratings agencies, which some of her allies say are politically driven.
The idea would be to introduce legislation to allow institutional investors to evaluate risk themselves and make decisions independent from the US-based agencies like S&P.
"I think it is very useful to look at this and see where if necessary we can make changes to legislation," Merkel said at her party meeting.
European leaders are set to meet on January 30 to discuss how to boost growth and jobs, and Merkel's words yesterday suggested she would also be looking for faster progress on tighter common fiscal rules.
But now, policymakers at the meeting may have to face a much larger problem. The downgrades threaten the top rating of Europe's current bail-out fund - the European Financial Stability Facility - as contributors France and Austria are no longer rated AAA.
A downgrade of the EFSF could increase its borrowing costs, reducing its ability to protect the currency bloc'sweaker members.
S&P said it would deliver its view on the impact to the EFSF from the downgrades "shortly".
Ratings summary
• S&P lowers long-term ratings on nine euro zone countries, including France and Austria
• France is at risk of a further downgrade
• European leaders see downgrades as a call to action
• Outlook for all but two euro zone countries now negative
