S&P cuts credit ratings for France, Italy, Spain

By Jamey Keaten

Associated Press

Published: Friday, Jan. 13 2012 4:22 p.m. MST

Musicians perform for money in downtown Rome, Friday, Dec. 30, 2011. Italy is at the focal point of the eurozone's struggle to deal with a crisis over heavy levels of government debt in a number of the 17 countries that use the single currency. Fears of default on those debts mean that bond investors demand ever higher interest. If a country can no longer borrow affordably to pay off bonds that are maturing, it winds up needing a bailout or defaulting.

Pier Paolo Cito, Associated Press

Enlarge photo»

PARIS — Ratings agency Standard & Poor's downgraded the government debt of France, Austria, Italy and Spain on Friday. But it kept Germany's at the coveted AAA level.

The downgrades deal a blow to the eurozone's ability to fight off a worsening debt crisis. All told, S&P cut its ratings on nine eurozone countries.

The rating agency ended France and Austria's triple-A status. It also lowered Italy's and Spain's by two notches and did the same for Portugal and Cyprus. S&P also cut ratings on Malta, Slovakia and Slovenia.

"In our view, the policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone," S&P said in a statement.

France's downgrade to AA+ lowers it to the level of U.S. long-term debt, which S&P downgraded last summer.

S&P had warned 15 European nations in December that they were at risk for a downgrade.

France is the second-largest contributor behind Germany to Europe's financial rescue fund. The fund still has a rating of AAA, which means that it can borrow on the bond market at low rates.

"It<s going to create bad headlines for a day or two," said Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics. But "there<s no underlying new information ... This will be quickly forgotten.<<

Still, the cut in the French credit rating may lead bond traders to raise borrowing costs for the fund, said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, a financial firm.

"There's a legitimate reason to be concerned," he said. "A weaker France means a weaker bailout fund."

Stocks fell Friday as downgrade rumors reached the trading floors of Europe and the United States. But the declines were nothing like the wrenching swings of last summer and fall, when the debt crisis threw the markets into turmoil.

The Dow Jones industrial average in New York was down 0.5 percent. Stocks fell 0.6 percent in Germany, 0.5 percent in Britain and 0.1 in France, but each of those markets closed before Baroin made his announcement on French television.

Borrowing costs for the French government rose before the announcement. The yield on France's 10-year government bond rose to 3.1 percent from 3 percent earlier. 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, the strongest economy in Europe, pays 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.

Speaking on France-2 Television, French Finance Minister Francois Baroin said the downgrade of France's AAA sovereign debt rating was not "a catastrophe." He underscored that France still had a solid rating.

"The United States, the world's largest economy, was downgraded over the summer," Baroin said. "You have to be relative, you have keep your cool. 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 euro4.75 billion ($6.05 billion).

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