S&P downgrades France and Austria reignited fears about the fiscal sustainability of the eurozone and the knock-on effect on its rescue fund, which could now lose its own triple A rating, reducing its firepower or forcing eurozone nations to increase contributions yet again
The eurozone debt crisis returned with a vengeance on Friday as Standard & Poor’s, the credit rating agency, downgraded France and Austria, two of the currency zone’s six triple A creditors, as well as other nations not in the top tier.
France’s triple A rating was cut a notch to double A plus, as was Austria’s.
Germany, the Netherlands, Finland and Luxembourg kept their triple A ratings.
“It is not good news ... but it is not a catastrophe,” said François Baroin, France’s finance minister. “It is not the ratings agencies that dictate the policies of France.”
S&P also cut the ratings of Italy, Spain and Portugal by two notches.
The news reignited fears about the fiscal sustainability of the eurozone and the knock-on effect on its rescue fund, which could now lose its own triple A rating, reducing its firepower or forcing eurozone nations to increase contributions yet again.
Financial markets slid as investors sold the euro, eurozone equities and sovereign bonds, especially from Italy and Spain – the latter move pushing down yields for German Bunds and US Treasuries, held to be havens.
The downgrades came in lockstep with new problems for the eurozone on other fronts – debt-restructuring talks between Greece and holders of its debt broke down over how large bondholders’ losses should be, raising the spectre of a Greek default in March.
In Frankfurt, the European Central Bank criticised the draft of a new fiscal discipline treaty for the euro area, saying that the latest version amounted to “a substantial watering-down” of tough deficit levels that could allow “easy circumvention of the [deficit] rule” by struggling governments.
ECB endorsement of the pact had been seen as crucial, since one of the main purposes of enshrining tough new debt and deficit rules was to give the central bank more leeway to purchase the bonds of Italy and Spain more aggressively, lowering their unsustainably high borrowing costs.
“These revisions in my view clearly run against the spirit of the initial general agreement on an ambitious fiscal compact,” Jörg Asmussen, an ECB executive board member, wrote in the letter obtained by the Financial Times.
The downgrades – announced after US markets closed on Friday – come after the S&P in December warned the six triple A nations and nine others in the eurozone that it had put their creditworthiness on review as a result of the debt crisis and the worsening economic outlook.
An Austrian official confirmed that S&P had downgraded Austria’s debt, with a negative outlook, citing the country’s economic and financial ties to Italy and Hungary.
S&P said: “Today’s rating actions are 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.”
Ahead of the statement confirming the downgrades, the euro fell more than 1 per cent to a 17-month low against the dollar and early gains on European stock markets were erased.
Sovereign bond markets were also rattled, with Italy and Spain’s borrowing costs creeping up again after several days of sharp drops. France’s 10-year bond yields edged up, to 3.05 per cent, while Germany’s 10-year bond saw its yield drop to 1.75 per cent as investors returned to safer assets.
Italy was hit with additional charges for the trading of the country’s government bonds by clearing houses. LCH.Clearnet SA raised margin payments for conventional bonds of maturities ranging between 3.25 years and 30 years, and 2 per cent on all Italian index-linked bonds.
Additional reporting by Eric Frey in Vienna, David Oakley in London, Joshua Chaffin and Alex Barker in Brussels, James Wilson in Frankfurt, Hugh Carnegie in London, Guy Dinmore in Rome and Scheherazade Daneshkhu in Paris
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