France and Austria lose AAA ratings; still AAA-rated Luxembourg, Finland, and the Netherlands put on negative credit watch by S&P

01/13/2012 6:32 pm EST


Jim Jubak

Founder and Editor,

First, it was a rumor, then a report, and now it’s confirmed fact: France has lost its AAA credit rating from Standard & Poor’s. Finance Minister Francois Baroin told French television today that the country had suffered a one-level downgrade. After the New York markets had closed S&P confirmed the downgrade of France and added downgrades of formerly AAA Austria and further downgrades of Spain and Italy. Luxembourg, Finland, and the Netherlands kept their AAA ratings but got dinged with a negative credit watch. (Meaning they’re in line for a possible downgrade.)

Baroin fell into line with recent comments from French President Nicolas Sarkozy and downplayed the significance of the downgrade. “It's a reduction of one level; it’s the same level as the United States,” he said. “It’s not a catastrophe.” Sarkozy is facing a tough re-election campaign and a downgrade certainly won’t help.

But I’d agree that it isn’t a catastrophe—especially since financial markets have seen this coming (although not this quickly in 2012). However, it will make life tougher for the EuroZone rescue fund, the European Financial Stability Facility. The fund sells bonds to support troubled EuroZone members such as Portugal and Ireland fund their debt at a lower interest rate than these countries can get themselves in the financial markets. (If they can get funding from the financial markets at all.) The fund pays a lower interest rate because of its AAA credit rating. But that AAA rating was based on the AAA rating of EuroZone members Germany, Netherlands, Finland, France and Austria.

Today’s action by S&P removed two more AAA-rated props to the fund’s own AAA rating. And put the AAA rating of another three in doubt. That leaves Germany as the sole solidly AAA country in the EuroZone.

The euro today fell to its lowest price against the U.S. dollar in 16 months at $1.2665.
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