EU Downgrade Threat Terrifies Investors -- UPDATED: Nine Eurozone Countries Downgraded

Scroll Down for an update to this story:

The euro hit its lowest mark in over a year Friday on fears of a widespread European downgrade. It’s a sour end to what could have been one of the more positive weeks for Europe since this whole debt debacle began.

Among the countries on the list for a double-notch downgrade are Italy, Spain and Portugal. France and Austria are facing a one-notch downgrade.

"The consequence (if France is downgraded) is that the EFSF [European Financial Stability Facility] cannot keep its triple-A rating," said Commerzbank chief economist Joerg Kraemer in a recent CNBC report. "That may irritate markets in the short term but wouldn't be a big problem in a world where the U.S. and Japan also don't have a triple-A rating anymore. Triple-A is a dying species."

While he does have a point about Triple-A ratings becoming increasingly rare, he may be mistaken about the effect multiple euro downgrades could have on the global economy.

A credit downgrade would escalate the threats to Europe's already disastrous financial system. It could drive up the cost of European government debt as investors demand more compensation for holding bonds deemed to be riskier than they had been. Higher borrowing costs would put more financial pressure on countries already contending with heavy debt burdens.

"To a large degree it’s widely anticipated," John Wraith, Fixed Income Strategist at Bank of America Merrill Lynch, told CNBC. "However, we think the reality of it is going to have a knock-on, ongoing impact on these markets."

“It clearly deteriorates still further the credit worthiness of a lot of the European banks and just keeps that negative feedback loop between struggling banks and the sovereigns that may have to support them if things go from bad to worse in full force,” Wraith added.

As mentioned in the above, talks of downgrades came just as the eurozone was receiving some positive news.

Earlier Friday, Italy had capped a strong week for government debt auctions, seeing its borrowing costs drop for a second day in a row as it successfully raised as much as €4.75 billion ($6.05 billion). On Thursday, Spain and Italy completed successful bond auctions. Meanwhile, European Central Bank (ECB) president Mario Draghi noted "tentative signs of stabilization" in the region's economy.

However, European and the U.S. markets continue to buckle under pressure as downgrade fears the continue to grow. Adding to the market uncertainty is the fact that talks in Athens between the Greek government and private investors failed to reach agreement on a crucial debt swap.

"Remain alert tonight when U.S. markets close," one eurozone source told Reuters.

Update: Ratings agency Standard & Poor's has downgraded the government debt of France, Austria, Italy and Spain by one notch, but maintained Germany's at the coveted 'AAA' level.

The cuts, which eliminated France and Austria's triple-A status, deal a heavy blow to the currency union's ability to fight off a worsening debt crisis.

Italy was lowered to BBB+ from A. Spain slipped to A from AA-.

The downgrades come as crucial talks on cutting Greece's massive debt pile appeared close to collapse Friday.

Update: Here's the final tally (via CNBC):

S&P lowered its long-term rating on Cyprus, Italy, Portugal and Spain by two notches, and cut its rating on Austria, France, Malta, Slovakia and Slovenia by one notch.

The Associated Press contributed to this article.