Markets shiver after France suffers credit rating downgrade

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THERE are renewed fears over Europe’s debt crisis today after France was stripped of its gold-plated AAA credit rating.

Last night’s blow to the beleaguered eurozone economy had been predicted earlier in the day, hitting the confidence of markets including the FTSE 100 Index which finished 0.5 per cent down.

Credit rating agency Standard & Poor’s (S&P) downgraded the eurozone’s second biggest economy one notch to AA+ which is likely to push up France’s borrowing costs.

The move is significant because France is partly responsible for underwriting the eurozone bailout fund, which is at the heart of efforts to ease fears of a eurozone collapse.

Market confidence was further hit by reports of a breakdown in talks between Greece and its banks to restructure its debts, fuelling fears of a default.

Austria was also expected to lose its AAA status last night, leaving just four of the 17 nations in the eurozone – Germany, the Netherlands, Finland and Luxembourg – with the top-notch rating.

Debt-ridden Spain and Italy are also in danger of suffering further downgrades.

The UK has so far clung on to its top rating but a recent report by rating agency Moody’s said the eurozone debt crisis had increased the risk of a downgrade.

Credit ratings are a measure of how risky it is to lend to a country. A downgrade can force countries to pay higher interest rates, putting their finances under further strain.

Losing its AAA rating will be an embarrassment for French President Nicolas Sarkozy, who is bidding for re-election later this year, and could hinder his efforts to steer the eurozone through the current crisis.

France’s central bank chief Christian Noyer recently reacted to suggestions that the country could lose its AAA rating by saying that the UK should be downgraded before France. But short-term predictions for the French economy are bleak, with expectations it will contract.

Market Report: Page 20.