UPDATED: January 14, 2012. US Ratings Agency Standard & Poor’s - S&P – has carried out a mass downgrade of eurozone countries, most notably, stripping France of its top-grade AAA rating in a move that may complicate efforts to solve the European debt crisis. S&P downgraded the credit ratings of nine eurozone countries in the major overhaul – Italy, Spain, Portugal and Cyprus by two notches, and France, Austria, Malta, Slovakia and Slovenia by one notch each. The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status.
S&P put 14 eurozone states on negative outlook for a possible further downgrade, including France, Austria, and the still AAA-rated Finland, the Netherlands and Luxembourg. Germany was the only country to emerge totally unscathed with its AAA rating and a stable outlook.
“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” the US-based ratings agency said in a statement.
In a more ominous setback on Friday, negotiations on a debt swap by private creditors – crucial to averting a Greek default – broke up without agreement in Athens, officials said more talks are likely next week. If Greece cannot persuade banks and insurers to accept voluntary losses on their bond holdings, a second international rescue package for the eurozone’s most heavily indebted state will unravel, raising the prospect of bankruptcy in late March.
France’s finance minister Francois Baroin confirmed the country’s ratings downgrade after emergency talks called by president Nicolas Sarkozy with the prime minister and other key ministers at Elysee Palace. ”It’s not good news, but it’s not a catastrophe,” Mr Baroin told the France 2 public network. ”It’s not ratings agencies that decide French policy.”
France still has a top AAA rating from the other two main ratings agencies, Moody’s and Fitch. The move will be a serious setback for Mr Sarkozy’s hopes of re-election, less than 100 days before the first round in a tight presidential vote.
The euro slipped to 16-month lows against the US dollar on news of the ratings overhaul. European stocks, which had been up on the day, turned negative but reaction to the widely anticipated news was moderate. Across the Atlantic, US stocks clawed back early sharp losses on S&P’s mass downgrade and new worries over Greece, but still ended Friday in the red. Eurozone finance ministers responded jointly to the ratings action in a statement, saying they had taken “far-reaching measures” in response to the sovereign debt crisis and were accelerating reforms towards stronger economic union.
German Chancellor Angela Merkel Calls For Swift Action After Eurozone Downgrade
German chancellor Angela Merkel says a mass ratings downgrade by Standard and Poor’s highlights the need to quickly implement a new EU pact for tighter economic integration. In her first reaction since S&P decided to cut the ratings of nine eurozone nations, Ms Merkel said Europe still faces a “long road” ahead to restore investor confidence.
“The decision confirms my conviction that we in Europe still have a long road ahead of us until investor confidence is again restored,” Merkel told reporters in the northern German city of Kiel. ”We are now called upon to implement quickly the fiscal pact, to implement it with determination, it’s also apparent that we have pursued resolutely this road of a stable currency, solid finances and sustainable growth.”
S&P downgraded the credit ratings of top-rated Austria and France, but not Germany, on Friday.
“It did not totally surprise us after the discussions of recent weeks,” Merkel said.
Merkel stressed that S&P was just one of three ratings agencies, and she pointed out a need for balance after a report earlier in the week by Fitch ratings agency which said it did not foresee a downgrade for France in 2012 unless the country received significant economic shocks. Merkel also said she did not believe the ratings downgrade would impact on Germany’s contribution to the European Union’s bailout fund, which is currently the EFSF with a lending capacity of 440 billion euros. That fund’s successor, the European Stability Mechanism, is due to take effect in July 2012 with funding of 500 billion euros.
Chancellor Merkel’s comments come as the European Union criticised the S&P’s ratings action. EU market commissioner Michel Barnier said he was “surprised” by the timing of the downgrades and “fundamentally of its evaluation, which does not take into account recent progress”.
“In every country, unprecedented efforts are taking place to control public spending,” Barnier said, adding that new rules are being introduced to deepen economic integration.
Austria, who suffered like France with a one-notch cut to AA+, said the S&P move was “incomprehensible” but recognised at the same time that some of the criticism might be justified, in which case the proper response was action.
“The downgrade is bad news but it should wake people up,” Austrian finance minister Maria Fekter said.
Defending its decision, S&P said strict austerity measures and budget discipline alone were not enough to combat the crisis. Many European countries remain on negative watch, with further downgrades a real possibility.