Triple-A Headache: Ratings Agency Set to Downgrade France

After making threats in December, ratings agency Standard & Poor's is now gearing up to downgrade the credit ratings of triple-A rated France and other euro-zone nations, media reports said Friday.

A government source told French TV that France would be downgraded, while another unnamed source said that Slovakia was next on the list. Germany, the euro zone's largest economy, along with the Netherlands, Belgium, and Luxembourg would be spared, according to unnamed European Union officials in Brussels.

S&P had already put 15 of the 17 euro-zone countries -- including its largest and best-rated economies Germany and France -- on credit watch negative. Amid the ongoing euro crisis, "systemic stresses" were mounting, the US-based ratings agency said at the time.

The euro-zone's current bail-out fund, the European Financial Stability Facility (EFSF), could also be at risk of a downgrade, S&P said then.

"The consequence (if France is downgraded) is that the EFSF cannot keep its triple-A rating," Jörg Krämer, chief economist at Germany's Commerzbank, told Reuters. "That may irritate markets in the short term but wouldn't be a big problem in a world where the US and Japan also don't have a triple-A rating anymore. Triple-A is a dying species."

Whiplash Effect

On Friday, S&P did not comment on the downgrade rumors, but that didn't stop the news from hitting the markets hard. Germany's DAX stock index plunged 1.7 percent on Friday afternoon before bouncing back slightly. The Dow Jones industrial average in the US was down 1.1 percent. The euro too dropped significantly against the dollar, falling below $1.27, its lowest level since September 2010.

Downgraded credit ratings could mean higher finance costs in the form of increasing interest rates for the affected countries. A worse credit rating for France, the EU's second-largest economy, could have grave consequences for ongoing euro rescue efforts. Still, higher interest rates are not automatic -- the United States still managed to borrow money at affordable rates after losing its AAA rating from S&P.

Should S&P confirm a downgrade for France, it would be in disagreement with its competitor Fitch. On Tuesday the agency said that France would likely keep its top rating for 2012. Nevertheless, the rumors of the downgrade created a sort of whiplash effect in the euro zone, where successful bond auctions in debt-laden Spain and Italy on Thursday had eased market tensions and sparked some rare optimism about the euro zone's chances.