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AAA No More: Credit Downgrade Hits France

Filed by KOSU News in World News.
January 14, 2012

Standard & Poor’s downgraded the sovereign debt of France, Italy, Spain and six other European countries on Friday. The move was highly expected, but it’s still a blow to France and sending shock waves across Europe. France is the eurozone’s second-largest economy, and its downgrade could even threaten Europe’s master plan to stop its debt crisis.

For weeks, French pundits have been speculating about when the downgrade would come and how harsh it would be.

In some ways the news that France’s credit rating was cut by one notch to AA+ is almost a relief — France can stop waiting for the other shoe to drop. And, analysts say, markets have already taken into account the effects of the downgrade. But it is still bad news for France and means the country’s borrowing costs are likely to go up.

And because France’s economy is so large, the impact of the downgrade will be felt well beyond French borders, says Philippe Dessertine, head of Paris’ High Finance Institute.

“Because of the French downgrade the refinancing of other European countries will cost more,” he says. “Today Greece has rates that are bearable because they’re guaranteed by the European stability fund. And this fund gives lower rates because of France and Germany’s AAA ratings.”

Because France has now lost its AAA rating, the European Financial Stability Facility will undoubtedly lose its top rating too, analysts say. Sylvain Broyer with Natixis says the downgrade could create havoc for Europe’s latest plan to contain the debt crisis by rewriting treaties to create a stricter fiscal eurozone. And he says there will now be more pressure on the European Central Bank.

Broyer says the solutions so far won’t satisfy the markets in the short term. Now, he says, the only solution is for the European Central Bank to massively buy up countries’ debt to give the new European plan time to work.

The downgrade will have political implications in France. President Nicolas Sarkozy is running for re-election in May. Until a couple of months ago, most French people didn’t even know what a AAA rating was, but Sarkozy turned it into a badge of honor, bragging about the notation in a speech to the nation in October.

“The AAA, we’ve got it,” he said. “Of Europe’s 27 countries only five have it and France is one of them.”

But lately Sarkozy’s government had been preparing for the downgrade by playing down the importance of a top rating. In a recent interview the president said it wouldn’t be good news if France lost it, but it wouldn’t be cataclysmic either.

Claude Weill, editor of the left-leaning magazine Le Nouvel Observateur, says now Sarkozy is trying to turn France’s loss of its AAA rating to his advantage.

“From the moment it became very clear that we are going to lose this AAA, Sarkozy changed his argument,” Weill says. “He said the situation is so hard, so complicated that you must trust me. I’m one, the only one who can run the country in this tempest.”

This tempest has already swept away governments in Spain, Greece and Italy. But Weill says in France, the opposition is weak and has proposed no alternative solutions to solving the debt crisis.

“As you know, French people are fed up with Sarkozy,” he says. “In [a] normal situation he would be beaten certainly.”

Weill says that’s the French paradox: Sarkozy may be one of the few European leaders saved by losing the AAA rating. [Copyright 2012 National Public Radio]

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