The eurozone economy plunged back into crisis on Friday as France and Austria were stripped of their top triple-A credit ratings and Standard and Poor’s (S&P) downgraded a swathe of debt-laden EU members.
Only Germany escaped unscathed, as all other eurozone members were either downgraded — some by two notches — or warned their current ratings were being re-examined amid fears about sovereign deficits.
Meanwhile, talks between private banks and Greece’s technocratic government on a managed write-down of Athens’ debt stalled, raising the prospect of a messy default in one of the eurozone’s weakest states.
S&P is only one agency; rivals Moody’s and Fitch have not issued the same downgrades, but the long-expected news hit the markets.
As news of the report card leaked out through the day, the euro plunged to a 16-month low against the US dollar, on what was a grim Friday the 13th for EU policymakers, and in particular for French President Nicolas Sarkozy.
The euro dived as low as US$1.2624, a level last seen in August 2010. By 22:00 GMT the euro had rebounded only slightly to US$1.2677 against US$1.2816 the day before.
The euro also fell to ￥97.20, the lowest level since December 2000.
“Unfortunately the downgrades are bad for the short and long-term outlook for the euro,” Kathy Lien of Global Forex Trading said.
In a statement released after US markets closed, S&P said an EU fiscal pact agreed last year “has not produced a breakthrough of sufficient size and scope to fully address the eurozone’s financial problems.”
The statement said France and Austria’s top “AAA” rating had been cut by one notch to “AA+” — with a negative outlook — while it left European powerhouse Germany unchanged at “AAA,” stable.
S&P cut its long-term ratings on Cyprus, Italy, Portugal and Spain by two notches; Malta, Slovakia and Slovenia by one notch.
Belgium, Estonia, Finland, Ireland, Luxembourg and the Netherlands all had their current ratings confirmed, but were placed on “negative watch” — meaning they could be downgraded in due course.
“We affirmed the ratings on the seven eurozone sovereigns that we believe are likely to be more resilient in light of their relatively strong external positions and less leveraged public and private sectors,” S&P said.
The ratings agency said the downgrade of France “reflects our opinion of the impact of deepening political, financial, and monetary problems within the eurozone.”
It said the outlook on the long-term rating on France is negative, which indicates that it believes that there is at least a one-in-three chance the rating could be lowered further this year or next.
“It’s not good news, but it’s not a catastrophe,” French Finance Minister Francois Baroin said, adding defiantly: “It’s not ratings agencies that decide French policy.”
The downgrade of Italy’s credit rating by two notches has made Rome even more determined to pursue reforms to tackle its debt crisis, a source in the prime minister’s office said.
“This valuation increases the Italian government’s determination to continue on the path undertaken ... balancing the budget, structural reforms and growth measures,” the source said.
The decision to downgrade Spain’s credit rating was a “heritage of the past,” said a government source, who stressed the new government’s plans to kickstart the economy.