Triple-A Headache: Ratings Agency Set to Downgrade France
In a major setback for euro rescue efforts, reports on Friday emerged that ratings agency Standard and Poor's was likely set to downgrade the credit ratings of France and other European Union nations. Following the news, the value of the euro fell sharply.
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.
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."
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.
-- kla, with wire reports
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