After US, S&P downgrades France's AAA credit rating

Standard & Poor’s on Friday stripped France of its sterling credit rating, cut Portugal’s credit to junk status and downgraded Italy’s debt by two steps in a wide-ranging action revision of European countries caught in the euro crisis.The actions, which lowered the ratings of nine countries, were the strongest signal yet that Europe’s sovereign debt woes were far from over and would pose fresh political challenges for politicians, including President Nicolas Sarkozy of France, as they try to stabilize the problem on the Continent, now in its third year.Another reminder of the continuing challenge came Friday from Greece, the original source of Europe’s debt troubles. A snag arose in talks between the new Greek government and its creditors — banks and other private investors — in which Athens hopes the bond holders will agree to take losses as a way for Greece to avoid a default.Together, the developments underscore that even as Europe’s debt turmoil enters its third year, no clear solutions are yet in sight — despite recent signs that financial market pressures might be easing as a result of a new lending program by the European Central Bank.In announcing the downgrades, Standard & Poor’s said: “Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone.”A downgrade by a single ratings agency like Standard & Poor’s could have an immediate, though not devastating, impact on the countries’ ability to borrow money. S.& P. warned in December that the agency was reviewing the credit ratings of more than a dozen European Union countries because of the crisis. Germany and the Netherlands, which were on the original list, did not receive a downgrade.European politicians had criticized S.&P.’s downgrade plans as providing no meaningful new information to investors but simply stoking a sense of crisis. In fact, the prospect of rating downgrades has already been priced into the bond auctions that Italy, Spain and other countries have held recently.Even before the announcement by S.&P., Finance Minister François Baroin of France confirmed the loss of France’s AAA grade to AA+, but he insisted the country was headed in the right direction and that no ratings agency would dictate the policies of France.“It’s not good news,” Mr. Baroin said on France television earlier in the day, but it is “not a catastrophe.”In addition to Italy (now BBB+) and Portugal (BB), two nations had their ratings cut by two notches — Spain (A) and Cyprus (BB+). Those lowered by one grade, along with France, were Austria (AA+), Malta (A–), Slovenia (A+) and Slovakia (A).The ratings of the other countries in the review — Belgium (AA), Estonia (AA–), Finland (AAA), Ireland (BBB+) and Luxembourg (AAA) — were unchanged.Of the 17 euro zone countries, only Greece, with the lowest rating of the group (CC), was not cited in the review.Rumors of imminent downgrades trickled out all day Friday, the end of a week in which Prime Minister Mario Monti of Italy and Mr. Sarkozy warned that the crisis could deepen if steps were not taken to stoke growth. Both delivered their messages to Chancellor Angela Merkel in her offices in Berlin, prompting the German leader to admit for the first time that the harsh program of austerity she has been pushing on the euro zone was not a cure-all for the crisis.S.& P. issued its warning last month after all three leaders held an emergency European summit meeting aimed at establishing a consensus for better fiscal discipline in the euro monetary union.But the bid to reassure the financial markets about the European Union’s resolve quickly fizzled, as investors fretted that the years-long efforts to strengthen the foundations of the euro currency club could be overwhelmed in the meantime by a looming recession in most of Europe.Last summer, Standard & Poor’s lowered the AAA rating of United States long-term debt by one notch, citing a threat to America’s finances from political gridlock in Washington.Interest rates for Treasury debt in the United States have remained at remarkably low levels as investors continue to avoid other risk. But in general, a downgrade is likely to make it costlier for a country to pay down its debt, as investors demand that the government pay higher borrowing costs to compensate for the loss of its risk-free status.In addition, the new European rescue fund, the European Financial Stability Facility, which is designed to prevent the contagion from spreading to large countries like Italy and Spain, would likely see its borrowing costs rise. France is one of its major financial backers, and if the country is downgraded, that could make the fund less effective in stemming the euro crisis.

After US, S&P downgrades France's AAA credit rating

The actions, which lowered the ratings of nine countries, were the strongest signal yet that Europe’s sovereign debt woes were far.

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