Downgrade 'bad news' but not 'a catastrophe'

French finance minister Francois Baroin went on television to admit the downgrade was ``bad news'' but insisted it was not ``a catastrophe''.

He said: “You have to be relative, you have keep your cool. It’s necessary not to frighten the French people about it.”

But the power of the credit ratings agencies was reflected in the instant market reaction and the fear in national eurozone capitals that ongoing economic crisis recovery talks could be dangerously set back by the latest assessment, putting the downgraded economies under further strain.

UK Independence Party leader Nigel Farage even suggested the development could mean “the beginning of the end” for the eurozone:

“Now that France has been downgraded I expect the bond yields of countries like Italy and Spain to rise, leading to a need for a bailout and more trouble for the Euro currency.

“The euro currency – the ultimate Federalist fantasy – has become a nightmare for those caught in its embrace.”

Mr Farage added: “This downgrade of France’s credit rating will make its debt more expensive and may prove to be the beginning of the end for Eurozone as we know it.”

The leader of Britain’s Conservative MEPs Martin Callanan said the downgrade, coupled with fresh difficulties for Greece over sorting out its debt problems, increased pressure on EU leaders to “stop fiddling with treaties and start tackling the immediate crisis”.

Twenty-six member states are trying to finalise a new “fiscal compact” to tighten controls on eurozone debt and deficit levels, but Mr Callanan said: “If European leaders really want to save the Euro, they need to listen to what the markets have already told them: it is time for some countries to leave the single currency. The longer we dither and obfuscate, the worse the crunch will be.”

He said the negotiations on the new pact had done little to calm markets, saying: “While European leaders have been gazing at their collective navel, market confidence has continued to decline.

“We take one step forward and five steps backwards in this crisis.

“The good news of the bond auctions on Thursday has been rapidly overtaken by the far worse news that eurozone contagion is both spreading and growing in severity.”

He warned: “We cannot afford to keep buying time with taxpayers’ money. Euro zone leaders must now face up to the reality that the eurozone disease will not begin to be cured until we remove the infected limb.

“The EU summit at the end of this month really is the last chance saloon for an injection of realism from EU leaders. If we see yet more discussion of treaties, bailout mechanisms and attacks on financial services then I fear we will soon pass the mark where we can salvage anything from the wreckage.”