Standard & Poor’s cuts credit ratings for France and eight other European nations
By Howard Schneider and Edward Cody,
Standard & Poor’s downgraded the credit ratings of France and eight other European nations Friday, further weakening the region’s finances and potentially raising costs for governments at a time when they already face a debt crisis.
The downgrade robs France of its prized AAA rating, despite vows by the French government to defend its pristine standing through recent measures to cut spending and raise taxes.
President Nicolas Sarkozy’s failure to win that battle could bode ill for the entire 17-nation euro zone — as well as for his own chances in an upcoming election.
The downgrades will likely increase borrowing costs for the affected governments as they try to raise hundreds of billions of dollars on international bond markets this year. France alone needs to borrow about $240 billion to finance its existing debts and annual deficit. Italy and Spain, two large nations that are facing escalating debt problems, were also among the countries downgraded.
The S&P actions could also undermine the effectiveness of the region’s bailout fund, which European leaders have been counting on to help ailing countries such as Greece and stem the crisis from spreading onward to Italy and Spain. The bailout fund’s AAA rating, and its ability to raise money cheaply, depends in part on the credit standing of France, the euro zone’s second largest economy.
S&P did not mention the fund, the European Financial Stability Facility, in Friday’s ratings note, but said an evaluation of other European institutions, including banks and “government-related entities,” would be issued “in due course.”
The S&P action left intact the AAA rating of Germany, which is the region’s largest economy, as well as those of Finland, the Netherlands and Luxembourg.
Another top-rated country, Austria, lost its AAA rating. The ratings of Portugal, Cyprus, Malta, Slovakia and Slovenia also were downgraded.
The ratings agency said its actions were based on concerns about weak economic conditions in the euro zone, coupled with what it judged as the “insufficient” steps taken by European leaders to address the situation.
Despite a plethora of summits, declarations and bailout deals, Europe has “not produced a breakthrough of sufficient size and scope to fully address the euro zone’s financial problems,” the ratings agency concluded. Political leaders, the agency contended, did not even fully appreciate the scope of a crisis that extends far beyond overspending in small countries like Greece to encompass the competitiveness of the euro zone itself.
The downgrade of France by one notch brings its rating to the same level as that of the United States, which was stripped of its AAA rating by S&P in August amid concerns over Washington’s handling of the federal debt.
The French downgrade highlights the growing divide between European countries such as Germany that still enjoy rock-solid faith on international markets and those whose finances are more questionable.
At the extreme, Greece, Portugal and Ireland have already required international help. The fight now is to prevent large nations like Italy and Spain from being engulfed in a crisis that U.S. officials consider a chief risk to the global economy.
Ratings made by firms such as S&P are an important metric for international markets. In some cases pension funds, insurance companies and other institutional investors are prevented by internal rules or regulations from buying bonds or securities that fail to meet a minimum rating.
French finance minister Francois Baroin sought to play down the impact of the small change from AAA to AA+ in his country’s credit rating, saying “this is not good news. . . . But it is not going to destabilize us.”
Similarly, a close Sarkozy adviser, Henri Guaino, disputed predictions that any rise in interest rates on government debt will automatically lead to higher interest rates for business and consumer borrowers, and further stress a French economy possibly heading into recession.
“Is this going to change anything?” he asked. “At this point, nobody knows.”
But Sarkozy clearly took the news seriously as he struggles to chart a successful euro-zone policy in conjunction with Germany Chancellor Angela Merkel, while also facing a stiff electoral challenge at home from Socialist Party candidate Francois Hollande.
The ratings drop undermines Sarkozy’s contention that, with nearly five years’ experience, he is better qualified to lead France through the continuing financial crisis. Justifying cutbacks in cherished social protections over the past two years, including raising the retirement age from 60 to 62, Sarkozy had said repeatedly that his austerity policy was necessary to preserve France’s AAA rating.
As Sarkozy huddled at his Elysee Palace with Prime Minister Francois Fillon and other key ministers awaiting the official announcement of the downgrade, Socialist Party official Marisol Touraine said the ratings action was proof of Sarkozy’s “failure.”
In a week that brought some positive news in the form of lower interest rates in recent Spanish and Italian bond sales, the S&P action was further evidence of the economic and financial shadow that remains over the euro, one of the world’s key economic areas. Ostensibly a foundation of world economic growth, the region now faces the possibility of a sovereign default and even the breakup of a currency union seen as one of the crowning achievements of post-World War II diplomacy.
It was that growing collection of risks — from a potentially explosive default by Greece on its debts to the possible onset of recession — that were cited by S&P in its downgrade notice.
S&P had warned several weeks ago that it had put the euro zone as a whole under review for a possible downgrade as slow economic growth and a stifling level of public debt combined to undermine the ability of government’s to pay their bills.
The action had been expected by investors, muting market reaction. Major European indexes fell by about half a percentage point, while the euro fell to around $1.26, the lowest in a year and a half. U.S. markets were also slightly lower.
The euro-zone nations have faced steady downgrades from all three major ratings companies since debt problems that erupted in Greece two years ago focused attention on the currency union. The Fitch Ratings Service recently upheld Austria’s AAA rating but cautioned that the euro-zone problems posed a risk for the financial standing of all countries in it. Moody’s recently warned of possible further downgrades of Italy and Spain.
With countries like Greece reduced to junk bond status, the role of the ratings companies has been controversial. Some European political problems blame them for stoking the debt crisis and have called for stricter regulation of their activities and on the use of their findings.
Cody reported from Paris.