Influential agency Standard & Poor’s has downgraded the credit rating of nine eurozone countries, including France.
Only Germany, Finland, Luxemburg and the Netherlands now retain a AAA credit rating in the eurozone, throwing into doubt the capacity of the European Central Bank to assist with the eurozone sovereign debt crisis.
France lost its coveted AAA rating late on Friday 13th January, receiving a new rating one notch lower at AA+. This followed an afternoon of speculation, with observers and journalists waiting late into the evening for an official announcement.
France was given a “negative outlook”, in common with every other eurozone economy apart from Germany and Slovakia. This means there is a 30% chance of a further credit rating downgrade.
Austria received a similar credit rating downgrade to France, from AAA to AA+.
Portugal saw its credit rating moved into “junk” territory, from BBB- to BB, which represents a very high risk to investors in Portuguese sovereign debt.
The reasons cited by Standard & Poor’s for these downgrades included a criticism of the response to the eurozone debt crisis, with the agency saying that austerity measures and budget discipline alone is not enough to resolve the crisis.
The EU economic affairs commissioner Olli Rehn was immediately critical of the downgrades, saying they did not reflect the “decisive action” he believes is being taken to resolve the debt crisis.
We hope that these downgrades will prompt real action from eurozone political leaders.
Agreeing on budget disciplines alone is like trying to use a water pistol to put out a house fire. Officials need to deploy bigger weapons against the situation, in order to avoid further downgrades and prevent the situation from spiraling out of control.
News of the downgrades has increased the odds of a partial eurozone breakup. We cannot imagine France in particular being very happy about their sovereign debt being downgraded, in part due to their association with other member states.
Whilst credit ratings agencies including Standard & Poor’s have a tarnished reputation due to some of their flawed ratings at the start of the global financial crisis, country ratings are usually less contentious than company ratings.
Of course all of this could have a further impact on the UK, despite it retaining its AAA credit rating and having a stable outlook. We could see some movement of investments to the perceived safer haven of the UK from riskier countries in the eurozone.
Relative to France, the UK is now an even stronger economy, further justifying the austerity measures being implemented by the coalition government.
It will be interesting to see how global stock markets react when they open on Monday morning and what further measures these downgrades prompt from eurozone leaders.
Photo credit: Flickr/mammal
