S&P cuts Volkswagen's credit rating after scandal

The international credit rating agency Standard and Poor's on Monday cut the long-term debt rating of German auto giant Volkswagen in the wake of the pollution-cheating scam involving its diesel vehicles.

S&P said in a statement it was downgrading VW's long-term debt rating by one notch to A- and could cut it "by up to two more notches" again in future in face of the "wide-ranging negative credit consequences following its admission that it installed software designed to manipulate diesel engine exhaust emissions in 11 million vehicles."

"The downgrade reflects our assessment that VW has demonstrated material deficiencies in its management and governance and general risk management framework," the analysts argued.

"We believe that VW's breach of US environmental law and potential other laws outside the US represents a significant reputational and financial risk to VW over the medium term," the statement continued.

Last month, VW became embroiled in the biggest scandal in its history, when US authorities accused it of fitting diesel cars with devices that can switch on pollution controls when they detect the car is undergoing testing.

They then switch off the controls when the car is on the road, allowing it to spew out harmful levels of emissions.

VW has already said it will set aside 6.5 billion euros ($7.4 billion) in provisions in the third quarter, but its new chief executive has said that sum would only cover the costs of repairs, and that much more was needed to meet potential fines and damages arising from any lawsuits.

"The costs of remediation, compensation, litigation, and potential fines could, however, be substantial and well in excess of this level," S&P said.

The analysts acknowledged that the full facts and consequences of the deception "may not be known for months, even years. We expect VW to experience a negative impact on its sales volumes, prices, and margins."