Standard & Poor’s is stripping France of its AAA credit rating for the first time, Agence France-Presse reported, citing an unidentified government official.
S&P won’t change its rating on Germany, the Netherlands and Luxembourg, the official said, according to AFP.
A downgrade by S&P would signal that the latest pledges by European leaders to clamp down on deficits and step up cooperation won’t be enough to end the region’s debt crisis and curtail the rise in France’s borrowing costs. The country’s benchmark 10-year bonds now yield 133 basis points more than debt of AAA-rated Germany.
A downgrade of France may further complicate Europe’s efforts to stem the crisis by threatening the rating of the region’s bailout fund. The European Financial Stability Facility, which is funding rescue packages for Greece, Ireland and Portugal partially with bond sales, owes its AAA rating to guarantees from the euro region top-rated nations. A French downgrade may prompt investors to demand higher rates on the fund’s debt.
French President Nicolas Sarkozy has tried to minimize the potential impact of a downgrade, calling it “not insurmountable” in an interview published in Le Monde on Dec. 12, three days after an all-night summit in Brussels that he had said was the last chance to save the euro.
“If rating companies pull it, we’ll face the situation coolly and calmly,” Sarkozy told the newspaper. “It would be an additional difficulty but it’s not insurmountable. What is important is the credibility of our economic policy and our strategy of reducing spending.”
Sarkozy’s spokesman Franck Louvrier declined to comment on reports today that the government has been notified by S&P of a cut in the country’s rating.
The downgrade would come amid signs that France is slipping into a recession, complicating Sarkozy’s bid for re-election in voting in April and May.
Sarkozy, who has sought to protect his government’s creditworthiness by announcing tax increases and spending cuts, has attempted to position himself as the most credible candidate on economic matters.
Those austerity measures are contributing to the slowdown in France. The economy probably shrank 0.2 percent in the fourth quarter and will contract 0.1 percent in the first three months, the national statistics institute Insee said on Dec. 16.
Sarkozy trails his main rival, Socialist Party candidate Francois Hollande, by about 14 points in voting intention for the second round of the election, according to a BVA poll for Le Parisien newspaper published Jan. 9.
S&P first placed the ratings of 15 euro nations, including AAA-rated Germany and France, on review for possible downgrade on Dec. 5 pending an assessment of the summit. EU leaders, in their fifth attempt to come up with a comprehensive solution to end the debt crisis, agreed at the Dec. 9 summit to forge a tighter fiscal union, shore up its bailout funds and tighten rules to curb future debts.
Moody’s Investors Service followed on Dec. 12, saying it would review the ratings of all European Union countries after the summit failed to produce “decisive policy measures” to end the region’s debt turmoil. Fitch Ratings on Dec. 16 lowered its outlook on France and put all the euro-region’s non-AAA rated countries on review for possible downgrade. Fitch then offered France some relief on Jan. 10 when it said that it did not expect to cut the country’s top rating this year.