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France loses top credit rating, govt says

By Jamey Keaten

Associated Press

Published: Friday, Jan. 13 2012 1:14 p.m. MST

PARIS — The French finance minister said Friday that Standard & Poor's had stripped the nation of its top-notch credit rating, again throwing Europe's ability to fight off its debt crisis into doubt.

Speaking on France-2 television, Finance Minister Francois Baroin confirmed that France had been lowered by one notch. That would mean a rating of AA+, the same rating the United States has had since S&P downgraded it last August.

Baroin said France had received a change to its rating "like most of the eurozone," referring to the 17 European nations that use the euro currency, but there was no confirmation from S&P that any other nation had been downgraded. S&P had warned 15 European nations in December that they were at risk for a downgrade.

A credit downgrade would escalate the threats to Europe's fragile financial system and raise the costs at which the affected countries — some of which are already struggling with heavy debt loads and low growth — borrow money.

Borrowing costs for the French government rose earlier in the day, when rumors of a looming downgrade began swirling through financial markets. The yield on France's 10-year government bond rose to 3.1 percent from 3 percent earlier in the day.

That is still less than the 3.36 percent rate on the same bond last week and far below the 6.6 percent that Italy has to pay to borrow money from bond investors for 10 years.

Germany, considered the strongest economy in Europe, pays just a yield of just 1.76 percent. The United States 10-year Treasury note paid 1.85 percent Friday, down 0.08 percentage points — a sign that investors were seeking safety in U.S. debt.

Financial markets did not appear to be thrown into turmoil by the French finance minister's announcement. Baroin said the downgrade was "bad news" but not "a catastrophe."

"You have to be relative, you have keep your cool," he said. "It's necessary not to frighten the French people about it."

Earlier Friday, the euro hit its lowest level in more than a year and borrowing costs for European nations rose. Stock markets in Europe and the U.S. fell.

Fears of a downgrade brought a sour end to a mildly encouraging week for Europe's heavily indebted nations and were a stark reminder that the 17-country eurozone's debt crisis is far from over.

Earlier Friday, Italy had capped a strong week for government debt auctions, seeing its borrowing costs drop for a second day in a row as it successfully raised as much as €4.75 billion ($6.05 billion).

Spain and Italy completed successful bond auctions on Thursday, and European Central Bank president Mario Draghi noted "tentative signs of stabilization" in the region's economy.

The downgrades could drive up the cost of European government debt as investors demand more compensation for holding bonds deemed to be riskier than they had been. Higher borrowing costs would put more financial pressure on countries already contending with heavy debt burdens.

In Greece, negotiations Friday to get investors to take a voluntary cut on their Greek bond holdings appeared close to collapse, raising the specter of a potentially disastrous default by the country that kicked off Europe's financial troubles more than two years ago.

The deal, known as the Private Sector Involvement, aims to reduce Greece's debt by €100 billion ($127.8 billion) by swapping private creditors' bonds with new ones with a lower value, and is a key part of a €130 billion ($166 billion) international bailout. Without it, the country could suffer a catastrophic bankruptcy that would send shock waves through the global economy.

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