January 13, 2012
Ratings agency Standard & Poor (S&P) downgraded the government debt of France, Austria, Italy and Spain on Friday, while keeping Germany's at the coveted AAA level. The downgrades deal a blow to the euro zone’s ability to fight off a worsening debt crisis.
The action may have more symbolic than fundamental financial impact but served as a reminder that Europe’s economic woes were far from over. But the downgrades may also be a blow to the euro zone’s ability to fight off a worsening debt crisis.
S&P ended France and Austria's AAA status by lowering their long-term rating by one notch, while downgrading Italy's and Spain's credit rating by two notches, Italy to BBB+ and Spain to A. The rating agency also cut ratings on Malta, Slovakia and Slovenia by one notch and Portugal and Cyprus by two notches.
The France's downgrade to AA+ lowers it to the level of U.S. long-term debt, which S&P downgraded last summer. France is the second-largest contributor behind Germany to Europe's financial rescue fund. The fund still has a rating of AAA, which means that it can borrow on the bond market at low rates.
After Friday, the only euro zone nations retaining their top AAA ratings are Germany, the Netherlands, Finland and Luxembourg.
As shown on the map of countries affected by the S&P's ratings downgrade below, the downgraded ratings range from AA+ for France & Austria to BB for Portugal.
In December S& P warned that it might downgrade many of the 17 nations that share the euro, largely because it said European politicians were moving too slowly to strengthen the monetary union and because the euro zone’s problems were propelling Europe toward its second recession in three years.
The downgrades could drive up the cost of European government debt as some commercial banks that are required to hold only the highest-rated government securities will have to replace French bonds with other assets, like bonds of Germany. Investors would also demand more compensation for holding bonds deemed to be riskier than they had been. Higher borrowing costs would put more financial pressure on countries already contending with heavy debt burdens.
In August, when S.& P. cut the United States a notch from its top-rank AAA rating, markets briefly plunged. But bond investors have continued to flock to the debt of the United States, which as the world’s largest economy has retained the perception of a financial safe haven. That has kept the United States government’s interest rates at very low levels. But none of the countries downgraded on Friday can necessarily count on such a reaction.
The euro hit its lowest level in more than a year and borrowing costs for European nations rose in earlier Friday.
Stocks fell Friday as downgrade rumors reached the trading floors of Europe and the United States. But the declines were nothing like the wrenching swings of last summer and fall, when the debt crisis threw the markets into turmoil.
The U.S. Dow Jones industrial average index was down 0.5 percent. Stocks fell 0.6 percent in Germany, 0.5 percent in Britain and 0.1 in France, but each of those markets closed before French Finance Minister, Francois Baroin, made his announcement on French television.