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.