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.