Last Updated: Sat Jan 14, 2012 09:26 am (KSA) 06:26 am (GMT)

S&P downgrades France and eight other euro zone nations

French and European flags are displayed during a news conference at the Hotel Matignon in Paris. (Reuters)
French and European flags are displayed during a news conference at the Hotel Matignon in Paris. (Reuters)

Standard & Poor’s stripped France of its top AAA rating on Friday and carried out a mass downgrade of half the nations in the euro zone, a move that may complicate European efforts to solve a two-year old debt crisis.

Germany, the bloc’s largest economy, was spared.

Nine of the 17 members of the euro area had their credit ratings cut, with Austria joining France in losing its AAA status. Those two, along with Malta, Slovakia and Slovenia had their ratings cut by one notch, while Italy, Portugal, Spain and Cyprus suffered two-notch downgrades.

S&P said it feared that initiatives European policymakers have taken to tackle the debt crisis “may be insufficient to fully address ongoing systemic stresses in the euro zone.”

Among the stresses facing the euro zone are tightening credit conditions and rising interest costs for a variety of euro zone debt issuers and weakening economic growth, it said.

At a summit on December 9, EU leaders secured agreement on drafting a new treaty for deeper economic integration in the euro zone, but the chances for more decisive measures to stem the debt crisis remain uncertain.

Friday’s decision may add to the debt problems as it is likely to increase euro zone borrowing costs across the board.

The move may trigger a series of downgrades of large European banks, companies and government entities. This may include the European Financial Stability Facility, or EFSF, the fund created to rescue troubled euro zone countries, and the European Union.

A downgrade of the EFSF could increase its borrowing costs, reducing its ability to protect the currency bloc's weaker members.

News of the downgrades was revealed earlier Friday by several European governments, and that pushed the euro and U.S. stocks lower while boosting safe-haven U.S. Treasuries.

S&P reaffirmed the ratings on seven other euro zone countries, including Germany. But it said that of the 16 countries reviewed, all save Germany and Slovakia have negative outlooks, meaning more downgrades are possible in the next couple of years.

“Europe is going to continue to struggle and we’re going to see further downgrades and higher yields until European leaders feel that they have the political support to decide whether or not the euro zone is going to be a political union going forward or merely an economic union,” said BNY Mellon currency strategist Michael Woolfolk.

However, the agency said it believed euro zone “monetary authorities have been instrumental in averting the collapse of market confidence.” The European Central Bank cut borrowing costs to 1 percent last year and has made cheap money available to euro zone banks to relieve funding pressures.

The mass downgrade, which follows its decision to strip the United States of its top credit rating last August, reduced to 14 from 16 the number of countries around the world that still hold a pristine AAA rating.

S&P was the first of the big three ratings agencies to touch the credit classification of a core European country such as France.

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