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Stock markets tumble on S&P French downgrade blow


France has lost its gold-plated AAA credit rating in another blow to the beleaguered eurozone economy, it has been confirmed.

Credit rating agency Standard & Poor's (S&P) downgraded the eurozone's second biggest economy in a move likely to push up France's borrowing costs. The French Finance Ministry said S&P had cut the rating by one point to AA.

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

Reports of a breakdown in talks between Greece and its banks to restructure its debts fuelled fears of a default and also drove markets lower. Austria is also expected to be downgraded, which would leave just four of the 17 nations in the eurozone with the top-notch rating.

S&P, which announced in December that it had placed all the eurozone countries under review, is due to leave the AAA ratings of Germany, the Netherlands, Finland and Luxembourg untouched.

Credit ratings are a measure of how risky it is to lend to a country. A downgrade can force countries to pay higher interest rates, putting their finances under further strain. Debt-ridden Spain and Italy are also in danger of suffering further downgrades, according to reports.

Losing its AAA rating will be an embarrassment for French President Nicolas Sarkozy, who is bidding for re-election later this year, and could hinder his efforts to steer the eurozone through the current crisis.

Confirming the news on French television, finance minister Francois Baroin said the downgrade was "bad news" but not "a catastrophe". He said: "You have to be relative, you have keep your cool. It's necessary not to frighten the French people about it."

Louise Cooper, markets analyst at BGC Partners, said: "It was anticipated this was going to happen. Get used to it, this is the world we now live in, this is what it looks like. Germany has kept its AAA rating but it is going to be increasingly isolated."

Ms Cooper said she thought the UK would keep its AAA rating for the time being: "Our financial position is better than France. I imagine we will lose our AAA at some stage but I am gloomy about things. We are not France. It does not take many quarters of negative growth for that to happen though."

PA Media