France loses AAA credit rating

French finance minister François Baroin has confirmed that the ratings agency Standard and Poor’s intends to strip France of its AAA credit rating. (photo, from lemonde.fr)

He confirmed the news on public television on Friday evening, after emergency talks called by president Nicolas Sarkozy with the prime minister and other key ministers.

S&P is downgrading France by one notch, to AA+.

“It’s not good news, but it’s not a catastrophe,” Mr Baroin said on France 2 television. “It’s not ratings agencies that decide French policy.”

“I confirm that France has received, like most eurozone countries, a notification of a change of its rating,” he said.

“It’s a downgrade, a one-notch change, it’s the same agency that downgraded the United States. It [the downgrade] means we must follow and amplify reforms. We must be bold. We must preserve employment,” he added.

S&P declined to comment, but an announcement is expected later.

France still has a top AAA rating with Moody’s and Fitch.

Markets

Earlier on Friday world stock markets plummeted after a European Union official disclosed S&P’s decision.

While Austria is also expected to lose its top AAA rating, Germany, Belgium, Luxembourg and the Netherlands will not be downgraded.

Most of the other governments already have lower ratings but a number of other eurozone countries are also said to hove been downgraded further by S&P on Friday, including Italy, Spain and the Irish Republic.

S&P had warned last month that it was reviewing the credit ratings of 15 of the 17 eurozone countries, saying they were all at a risk of a downgrade because of the continent’s ongoing debt crisis.

The news that talks had been broken between Greece and its private sector lenders – including a 50% forgiveness – also scared the markets, because an agreement is a precondition for the country to receive its next round of bailout money from the European Union and the International Monetary Fund (IMF).

Without that money, Greece would be unable to repay its debts.

Borrowing cost

Last August S&P downgraded the United States’ top-notch AAA rating.

The downgrading of a country impacts the population because banks and investors use credit ratings to decide how much money to lend to particular borrowers.

Also the cut in the sovereign ratings of governments usually leads to most other borrowers located in the same countries – such as banks and companies – being downgraded.

As a result the downgrade, even though it has been widely expected, is likely to make it more difficult and expensive for those countries borrowers – including the governments – to raise money.

After the rumours emerged, Italy’s 10-year implied cost of borrowing in bond markets jumped by a third of a percentage point, however it ended the day largely unchanged at just over 6.6%.

France’s borrowing cost also rose but slightly, from 3.03% to 3.07%.

Considered the safest borrower in the eurozone, Germany saw its borrowing cost fall from 1.83% to 1.76%.

And the downgrades of eurozone countries may also have an impact on the eurozone’s rescue fund, the European Financial Stability Facility (EFSF), because it is guaranteed by the eurozone governments.

Before the downgrades the EFSF, which has already been used to rescue Portugal and the Irish Republic and is supposed to help Greece, was already having trouble borrowing money in order to provide its rescue loans.