French leaders play down triple-A rating loss as Euro-crisis deepens

Europe was plunged into crisis again and the French government was on the defensive after the Standard & Poor’s agency stripped France and Austria of their top-notch triple A and either downgraded or warned every other eurozone member apart from Germany.

Reuters/Gonzalo Fuentes

French Prime Minister François Fillon on Saturday declared that the downgrade was expected and said it should not be “overdramatised”, following up on Finance Minister François Baroin's assertion that the decision was "not a catastrophe".

Fillon hit back at Socialist François Hollande, saying that he was “particularly wrong” to say that it was the government’s economic policy that had failed.

Earlier Hollande, his party’s candidate in the forthcoming presidential election, took a swipe at President Nicolas Sarkozy’s earlier attempts to pose as the chief defender of Europe’s economy, commenting, “It’s a policy that has been downgraded, not France.”

And he told Le Monde newspaper, “We are no longer in the first division.”

Standard & Poor late Friday downgraded France and Austria to AA+, with a negative outlook, cut its long-term ratings on Cyprus, Italy, Portugal and Spain by two notches and Malta, Slovakia and Slovenia by one notch.

Belgium, Estonia, Finland, Ireland, Luxembourg and the Netherlands all had their current ratings confirmed, but were warned they could be downgraded in due course.

Anthony Terrade/RFI

Austria was quick to point out that Standard & Poor’s is only one of three US rating agencies and declared the move “incomprehensible”.

European Union internal markets commissioner Michel Barnier, a former French foreign affairs minister, said he was “surprised” by the timing as the EU toughens its budget rules and Economic Affairs Commissioner Olli Rehn called the downgrades “inconsistent”.

German Chancellor Angela Merkel told a meeting of her Christian Democrat (CDU) party that a planned Europe-wide spending pact should be agreed quickly because “we have a long road ahead of us until investor confidence is again restored”.

Although Germany was the only eurozone country not hit by the S&P move, Merkel’s colleagues expressed solidarity with France and other affected countries.

“This step is out of order,” said CDU vice-president Michael Fuchs, accusing Standard & Poor’s of playing politics. “Why doesn’t it act on the highly indebted United States or highly indebted Britain?”

What will losing the triple A mean?

• France will pay more interest on state borrowing, scheduled to be 180 billion euros this year, further boosting state debt;
• Local authorities’ debts will get bigger – many owe large amounts to banks whose interest rates will go up – pushing up local taxes;
• State institutions, such as social security, will pay higher interest rates, as will companies that are all are part-owned by the state;
• Mortgages and other personal loans in France and other downgraded countries may become more expensive;
• Foreign investors, such as pension funds, may put their money elsewhere;
  Europe will have more austerity – finance ministers say they will agree a new treaty to tighten fiscal rules at the end of the month;
• Some European banks may be downgraded because their governments are seen as too risky to back them up if necessary;
• The European Financial Stability Fund - the eurozone bailout fund - could be downgraded since its rating depends on that of the six top-rated countries;
• Nicolas Sarkozy will die (electorally) - "If France loses its AAA, I'm dead," he told aides in October, according to Le Canard Enchaîné weekly.

There was bad news from Greece on Friday, too.

Its private creditors refused to write off 50 per cent of their loans in talks with the government.

Talks will resume on Wednesday after EU, International Monetary Fund and European Central Bank officials have arrived in Athens to discuss a new 130 billion-euro bailout package, which will not be possible if there is no deal with the banks, insurance companies and hedge funds that have leant it money.