The eurozone crisis entered a dangerous new phase as France and eight other European countries had their credit ratings downgraded.
Stock markets and the single currency fell sharply as Standard and Poor’s cut France’s AAA rating.
Italy saw its long-term rating drop by two notches, along with Spain, Portugal and Cyprus. Austria, Malta, Slovakia, and Slovenia had their ratings lowered by one notch.
The move triggered a backlash from European politicians and led to calls for Britain to be downgraded too.
It represents a further loss of confidence in the single currency and the European Union’s ability to rescue indebted eurozone members.
The agency’s move also threatens to torpedo the main European bail-out fund set up to support struggling countries such as Greece and Portugal.
There are growing fears that Greece, which was not reassessed, is edging closer to defaulting on its debts and being forced out of the single currency. Talks between the country and its creditors were put on hold.
There was no change for Germany, the Netherlands, Ireland, Belgium, Estonia, Finland or Luxembourg.
The blow to France is the most significant. It has held a AAA rating since 1975. As well as hurting national pride, the lower rating will inevitably mean the country faces higher borrowing costs. It will also affect the eurozone bail-out fund, which is at the heart of efforts to ease fears about the currency bloc, as France is partly responsible for underwriting it.
Those worries pushed the single currency to its lowest value against the US dollar since mid-2010. The euro also fell against the pound to 82.9 pence.
European stock markets closed before the downgrades were confirmed, but rumours saw shares fall across the continent. Bigger falls are likely on Monday when markets reopen. The FTSE-100 index also fell on concerns about the possible impact on Britain, closing down 0.5 pc at 5636.
François Baroin, the French finance minister, confirmed that France was being downgraded from AAA to AA+. It was “not a catastrophe”, he said. But it is a heavy blow to Nicolas Sarkozy, the French president, who faces re-election in May.
He and his European allies have publicly attacked the international ratings agencies, accusing them of seeking to undermine the eurozone.
French officials have said that Britain is more deserving of a downgrade than France. A senior German politician joined their calls on Friday night. Michael Fuchs, a member of the governing Christian Democrats, said that Standard and Poor’s was “playing politics”.
“If the agency downgrades France, it should also downgrade Britain in order to be consistent,” he said. Wolfgang Schaeuble, the German finance minister, played down the downgrades. “We should not overestimate the ratings agencies in their assessments” he said.
Despite the gloom, some economists were relieved that stronger eurozone economies were spared by the agency, which last year downgraded the US amid concerns about its deficit.
After the downgrading of France and Austria, only 12 EU countries retain AAA ratings from Standard and Poor’s.
Britain is one, and is now likely to see a further fall in the Government’s borrowing costs as investors seek the security of British bonds. The UK Government refused to comment, but insiders reported a mood of “grim satisfaction” that its deficit-cutting strategy meant there was no real threat of a downgrade.
Italy’s downgrade, to BBB+, will raise doubts about its ability to sustain a huge national debt in the weeks ahead.
Eurozone governments led by Italy and Spain are due to sell more than €200bn of bonds over the next three months. Italy is already paying almost 7pc, the level generally agreed to be unsustainable. If investors refuse to buy all its bonds, Rome would be forced to seek a bail-out far bigger than any given to the smaller eurozone nations.
It would almost certainly have to be led by the International Monetary Fund or the European Central Bank, which has so far refused to give such direct support.
According to Fitch, another ratings agency, the French downgrade will reduce the €440bn lending capacity of the European Financial Stability Fund, the euro bail-out mechanism, to €293bn. It has already committed around €250bn to Greece, Ireland and Portugal.