S&P strips France and Austria of prized AAA ratings

By Ann Cahill, Europe Correspondent

Saturday, January 14, 2012

TWO of the eurozone’s six triple A-rated countries, France and Austria, were downgraded from AAA to AA last night by credit ratings agency Standard and Poor’s.

Standard & Poor’s also cut ratings on eight other eurozone countries, including Italy (down two notches to BBB+), Spain and Portugal. It placed a negative outlook on all but two of the 17 eurozone nations, saying policies on the crisis may be insufficient.

Earlier 10-year bonds for a number of eurozone countries dropped in expectation of the downgrades by two notches to BBB+.

The move would be a serious blow for the EU’s rescue efforts and would threaten the status of the EU’s bailout fund, which would see Ireland paying more for its rescue loans.

Jorg Kramer, chief economist at Germany’s Commerzbank, told Reuters earlier yesterdfay that if France was downgraded, the EFSF would not keep its triple-A rating. But he did not believe this would pose a major problem for the fund.

"That may irritate markets in the short term but would not be a big problem in a world where the US and Japan also do not have a triple-A rating," he said. "Triple-A is a dying species."

However, the EFSF had problems raising funds earlier in the year and had to pay more than previously. The interest rate it has to pay would be passed onto Ireland.

This is expected to put pressure on EU states to increase the effective lending capacity of the €440 billion fund, something Germany has been reluctant to do. It would also force them to introduce the new permanent fund, the European Stability Mechanism earlier than planned, possibly in July.

The downgrading will also colour the informal summit of EU leaders on January 30, where they will discuss the wording of the new fiscal treaty, and it will be discussed also at the eurozone finance ministers meeting on Monday, January 25.

Tánaiste Eamon Gilmore put the French downgrade down to uncertainty in the eurozone. "A lot of these market responses and these rating agency response is probably due to the degree of uncertainty there has been around the eurozone in recent times," he said.

"We should not be prisoners of what ratings agencies think. I know they are extremely powerful, they’re extremely influential, but I think that you need to put it into perspective that this is an opinion of what [are], at the end of the day, private institutions."

As soon as the rumours begun and were swiftly confirmed yesterday afternoon by anonymous sources in Paris the markets were hit and the euro lost significantly against the dollar, hitting a 16-month low.

Austria’s rating was threatened by the effect on their banks of the crisis in Hungary.

It reversed the optimism created on Thursday when auctions by Spain and Italy were oversubscribed and short-term bonds sold at up to half previous rates.

Earlier this week Fitch, one of the three main credit rating agencies, said it expected France to keep its triple-A rating for the year, while Moody’s and Fitch late last year reaffirmed Austria’s AAA rating.

But few would be surprised by the S&P move, as in early December they warned they were considering downgrading all eurozone members, and the EFSF.

French president Nicolas Sarkozy told Le Monde newspaper that "we will face the situation coolly and calmly", and added that it would not be insurmountable.

Meanwhile, negotiations between Greek officials and representatives of credit banks broke off when both sides could not agree the size of the haircut in a swap. EU sources saw this as posturing with the banks trying to increase what the deal would be worth to them.

Additional reporting by Bloomberg and Reuters

This appeared in the printed version of the Irish Examiner Saturday, January 14, 2012