France downgrade fuels fresh euro worries

The eurozone crisis was facing fresh turmoil today after the credit worthiness of France and eight other eurozone nations were downgraded by a leading ratings agency.

In a dramatic new blow to the struggling single currency, Standard & Poor's (S&P) stripped France of its gold-plated AAA credit rating, and also lowered the long-term ratings on Austria, Malta, Slovakia, and Slovenia, by one notch.

The rating levels for Cyprus, Italy, Portugal and Spain were dropped two notches, while there was no change for Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands.

The 17th eurozone nation, Greece, already in deep trouble, was not reassessed in the latest, devastating declaration from Standard & Poor's yesterday.

The move to strip France of its AAA is key because the country is partly responsible for underwriting the eurozone bailout fund, which is at the heart of efforts to ease fears of a eurozone collapse.

French finance minister Francois Baroin admitted 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."

In an implicit attack on EU leaders' failure to reassure markets, S&P said its ratings actions were "primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone".

The agency also accused EU leaders of believing wrongly that blame for the economic crisis lay mostly on "fiscal profligacy at the periphery of the eurozone".

It added in a statement: "The outlooks on the long-term ratings on Austria, Belgium, Cyprus, Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, and Spain are negative, indicating that we believe that there is at least a one-in-three chance that the rating will be lowered in 2012 or 2013."

World markets fell as news emerged that the downgrade was about to be announced with the euro declining against most currencies, including the pound.

Reports of a breakdown in talks between Greece and its banks to restructure its debts fuelled fears of a default and also drove markets lower.

S&P's decision to downgrade nine eurozone nations sparked an angry reaction from Brussels, who defended its handling of the crisis.

Economic Affairs Commissioner Olli Rehn declared in a statement: "I regret the inconsistent decision by Standard & Poor's concerning the rating of several euro area member states, at a time when the euro area is taken decisive action in all fronts of its crisis response.

"These initiatives push forward the necessary fiscal consolidation and structural reform in our member states, address the fragilities of the banking sector, reinforce our financial backstops and strengthen our economic governance.

"The recent EU decisions, combined with action by the European Central Bank, CB, have been instrumental in easing tensions in sovereign bonds markets."

Mr Rehn said it was now important to finalise the details of a new bail-out plan for struggling eurozone economies so that it can come into force in July this year.

However, UK Independence Party leader Nigel Farage suggested the latest round of downgrading 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," he said.

"The euro currency - the ultimate Federalist fantasy - has become a nightmare for those caught in its embrace."

Meanwhile, the leader of Britain's Conservative MEPs Martin Callanan said the downgrade, coupled with the 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 added: "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."

In August, S&P stripped America of its cherished triple-A credit rating for the first time in its history because the deficit reduction plan passed by Congress did not go far enough to stabilise the country's debt situation.

The UK has so far clung on to its top rating but a recent report by rating agency Moody's said the eurozone debt crisis had increased the risk of a downgrade.