France loses AAA credit rating

The rating, which can affect borrowing costs, has been lowered one notch to AA+ by Standard and Poor’s.

The move is a fresh blow to politicians attempting to get the eurozone back on track after a calamitous 2011 – and has been exacerbated by signs from Greece that the government’s talks with bankers are going badly.

In response to rumours of the downgrade earlier, the euro fell against the dollar to below $1.27.

Confirming the downgrade on French television, Finance Minister Francois Baroin said the downgrade was “bad news” but not “a catastrophe”.

As well as hitting France’s borrowing costs, the downgrade could have a profound impact on plans to save the euro, because France – one of the eurozone’s strongest economies – is partly responsible for underwriting the eurozone bailout fund that is at the heart of the recovery strategy.

It’s also an embarrassment for French President Nicolas Sarkozy, who is bidding for re-election later this year.

This is the day the euro crisis burst into 2012 with a vengeance. Economics Editor Faisal Islam

But they can’t say they weren’t warned: in December last year, S&P announced it had placed all the eurozone countries under review. Austria is also expected to be downgraded later, which leaves just four of the 17 nations in the eurozone with the goldplated AAA rating: Germany, the Netherlands, Finland and Luxembourg.

Credit ratings are a measure of how risky it is to lend to a country – and debt-ridden Spain and Italy could yet slip even further down the ratings, reports suggested.

Channel 4 News Economics Editor Faisal Islam said: “This is of huge significance to the eurozone’s fitful efforts at a long-lasting rescue. The AAA rating of France is absolutely fundamental to the current rescue plan.

“The net impact of all of this is to raise the burden hugely on Germany, making real what has always been clear – which is that Germany has a lonely decision to make as to whether to write a very large cheque drawn from Berlin or contemplate allowing the ECB in Frankfurt to engage in much more US and UK style aggressive moves such as buying up govt debt. That’s been anathema to Germany – will the S&P downgrade change things?

“Put together with signs that Greek government talks with bankers are going badly, this is the day that the euro crisis burst into 2012 with a vengeance. And a final thought for those harbouring schadenfreude from the UK – it’s only really the fact that the Bank of England is buying up such a huge proportion of Britain’s debt that is saving us. It wouldn’t take much of an increase in the temp of the euro crisis for Britain to follow.”

Read more in Faisal Islam’s blog: Rumours of a French downgrade – and what it could mean

Political impact
Rumours that France was on the verge of being downgraded have been circulating since December - and have caused unprecedented tension between Paris and London.

Worried about what appeared to be coming, France's finance minister and central bank governor rounded on Britain in mid-December, saying its economy was in a worse state.

Finance Minister Francois Baroin described the British economy as "very worrying" and said "that from an economic standpoint, "we prefer being French than British". Bank Governor Christian Noyer said Britain should be downgraded before France because it had a higher budget deficit and lower growth.

These strong words prompted Deputy Prime Minister Nick Clegg to tell Mr Fillon, in French, that his comments were "unacceptable" and France needed to "calm the rhetoric". Downing Street pointed out that Britain was paying less interest on its borrowing than France, a sign that the bond markets had more faith in the British economy than the French. Being downgraded can lead to countries paying even more interest on their debts. Although Britain has clung on to its AAA rating, the credit rating agency Moody's has said that the eurozone debt crisis has increased the risk of a downgrade.