Sunday 4 December 2016

Eurozone crisis worsens after France loses top AAA rating

Maeve Dineen and Emmet Oliver

Published 14/01/2012 | 05:00

THE eurozone crisis entered a dangerous new phase last night after France and eight other European countries were hit by damaging downgrades in their credit ratings.

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Credit rating agency Standard & Poor's (S&P) stripped France of its gold-plated AAA credit rating, and also lowered the long-term ratings on Austria, Malta, Slovakia, and Slovenia, by one notch.

The rating levels for Cyprus, Italy, Portugal and Spain were dropped two notches.

There was no change for Ireland, Belgium, Estonia, Finland, Germany, Luxembourg, and the Netherlands. Germany held on to its much coveted 'AAA' rating.

Greece, already in deep trouble, was not reassessed in the latest, devastating declaration from Standard & Poor's.

Stocks, euro fall

Stock markets and the value of the single currency fell sharply as news leaked earlier in the day that Standard and Poor's were to cut the ratings of a raft of countries.

The cuts deal a heavy blow to the currency union's ability to fight off a worsening debt crisis. All of the countries downgraded will inevitably face higher borrowing costs.

The move to cut France is key because it is partly responsible for underwriting the eurozone bailout fund, which is at the heart of efforts to ease fears of a eurozone collapse.

This could potentially torpedo the main European bailout fund, set up to support struggling countries like ourselves, Greece and Portugal.

"In our view, the policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone," S&P said in a statement.

The downgrades also come as crucial talks on cutting Greece's massive debt pile appeared close to collapse Friday. Talks between Greece and its creditors were put on hold.

Without a deal to reduce Greek liabilities, the country could jeopardise an international bailout and be forced into a devastating default.

Worries about the eurozone pushed the single currency down to its lowest value against the US dollar since mid-2010. The euro also fell against the pound.

European stock markets closed before the downgrades were confirmed, but rumours of the move saw shares across the continent fall. Bigger falls are likely on Monday when markets reopen.

Action

France's Finance Minister Francois Baroin said last night the decision would spur action by his country.

"I confirm that France has received, like most eurozone countries, a notification of a change of its rating," Mr Baroin said.

"It's a downgrade, a one-notch change; it's the same agency that downgraded the United States. It (the downgrade) means we must follow and amplify reforms. We must be bold. We must preserve employment," he added. The move is "not a catastrophe", he said.

However, France has held its AAA rating since 1975, and its loss represents a serious wound to the country's claims to be a top-flight global economy.

The downgrade is also a heavy blow to Nicolas Sarkozy, the French president. He is facing re-election in May, and polls suggest he will be lose.

Mr Sarkozy and his European allies have publicly attacked the international ratings agencies, accusing them of a systematic attempt to undermine the eurozone.

Wolfgang Schaeuble, the German finance minister, played down the downgrade, questioning the credibility of the agencies.

"We should not overestimate the ratings agencies in their assessments" he said.

Despite the gloom, some economists were relieved that stronger eurozone economies led by Germany and the Netherlands were spared by Standard and Poor's, which last year downgraded the US amid concerns about its deficit.

After the downgrading of France and Austria, only 12 EU countries will retain AAA ratings from Standard and Poor's.

S&P first placed the ratings of 15 euro nations, including Germany and France, on review for possible downgrade before a December 9 EU summit.

Apart from the blow to the country's prestige, France is the second largest guarantor of the EFSF, which currently has a AAA rating.

Preserving that status would require members to increase their guarantees, which could prove politically unpopular.

France has the highest debt ratio of the eurozone's AAA-rated countries, and the government has refused to take further savings measures before the election, insisting it can meet its fiscal targets.

The euro fell by more than a cent to $1.2650 as rumours swept the markets earlier in the day. It also fell to 82p against sterling.

Bond futures

European stocks, which had been up on the day, turned negative. Safe-haven German 10-year bond futures rose to a new record high, while the risk premium investors charge on French, Spanish and Belgian debt widened in reaction.

Meanwhile, Eurozone governments led by Italy and Spain are due to sell more than €200bn of bonds in the next three months

Italy is currently paying almost 7pc to borrow, the level generally agreed to be unsustainable.

If investors refuse to buy all the bonds that Italy tries to sell, the Rome government would be forced to seek an international bailout far bigger than any rescue package given to the smaller eurozone nations.

Any bailout for Italy would almost certainly have to be led by the International Monetary Fund or the European Central Bank, which has so far refused to give direct support to the lending of indebted eurozone states.

Irish Independent

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