France and Austria lost their top AAA credit ratings on Friday (13 January) as seven other eurozone countries were also downgraded by US-based ratings agency Standard & Poor’s (S&P).
The move was described by European leaders as “political” and “inconsistent”, and China claimed the move cast doubt on the credibility of credit ratings agencies.
France and Austria were nudged down one notch by S&P, to AA+, but retain top ratings from the other two main agencies, Moody’s and Fitch.
Two notches were struck from the ratings of Italy (to BBB+), Spain (to A), Cyprus (to BB+) and Portugal (to BB), whilst Germany kept its AAA rating with a stable outlook. One notch was knocked from Malta (to A-), Slovakia (to A) and Slovenia (to A+).
Rumours of S&P’s move prompted stock market volatility earlier in the day, but there was some stabilisation before markets closed.
Austrian bank chief says move was political
S&P cited Austria’s economic exposure to recession-struck Italy, and banking exposure to debt-riddled Hungary, as reasons for the downgrade.
But the head of Austria’s central bank – Ewald Nowotny – described the move to downgrade so many countries in the eurozone simultaneously as “clearly political”, a sentiment echoed by the country’s finance minister, Maria Fekter.
“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” S&P said in its statement.
The agency said the plan currently being discussed by eurozone leaders – to limit governments’ future borrowing – was based on a misdiagnosis of the cause of the financial crisis. It said the crisis was more to do with trade deficits and a loss of competitiveness by “periphery” eurozone economies such as Italy and Spain, than excess borrowing by governments.
Not a catastrophe for France
But Economic Affairs Commissioner Olli Rehn said that he regretted S&P’s “inconsistent decision” made “at a time when the euro area has taken decisive action in all fronts of its crisis response.”
Michael Fuchs, deputy leader of the ruling German Christian Democrats, said: “This step is out of order. Standard and Poor’s must stop playing politics. Why doesn’t it act on the highly indebted United States or highly indebted Britain?”
“If the agency downgrades France, it should also downgrade Britain in order to be consistent”, Fuchs said.
“It’s not good news, but it’s not a catastrophe,” French Finance Minister François Baroin said following emergency talks called by President Nicolas Sarkozy with the prime minister and other key ministers.
He said the French government would not change policy course as a result, adding: “It’s not ratings agencies that decide French policy.”
Chinese join in criticism of S&P
China also condemned the S&P decision. The Xinhua news agency, which often represents the government’s official view, said in a commentary: “The Standard and Poor’s (S&P) downgrade move, though containing some legitimate concerns, also raised fresh doubts over the credibility of ratings agencies.”
“As the crisis is showing tentative signs of receding, the S&P’s overwhelming downgrade has once again weighed on the market and dented investors’ confidence,” Xinhua said.
The downgrades – especially of Austria and France – will put pressure on the European Financial Stability Facility (EFSF), which has already been used to rescue Portugal and the Irish Republic. The EFSF is guaranteed by the eurozone governments, and therefore relies on their credit worthiness.