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France loses AAA-rating

January 14, 2012

France’s finance ministry says Standard & Poor’s has cut the country’s credit rating by one notch to AA.

France’s loss of its AAA-rating deals a heavy blow to the eurozone’s ability to fight off its debt crisis. The country is the second-largest contributor to the currency union’s bailout fund.

S&P in December put 15 eurozone countries on creditwatch and other downgrades were expected later Friday.

The cut in France’s creditworthiness could also hurt President Nicolas Sarkozy’s re-election chances.

Europe’s ability to fight off its debt crisis was again thrown into doubt Friday when the euro hit its lowest level in over a year and borrowing costs rose on expectations that the debt of several countries would be downgraded by rating agency Standard & Poor’s.

Stock markets in Europe and the U.S. plunged late Friday when reports of an imminent downgrade first appeared and the euro fell to a 17-month low.

The fears of a downgrade brought a sour end to a mildly encouraging week for Europe’s heavily indebted nations and were a stark reminder that the 17-country eurozone’s debt crisis is far from over.

Earlier Friday, Italy had capped a strong week for government debt auctions, seeing its borrowing costs drop for a second day in a row as it successfully raised as much as euro4.75 billion ($6.05 billion). Spain and Italy completed successful bond auctions on Thursday, and European Central Bank president Mario Draghi noted "tentative signs of stabilization" in the region’s economy.

A credit downgrade would escalate the threats to Europe’s fragile financial system, as the costs at which the affected countries — some of which are already struggling with heavy debt loads and low growth — could borrow money would be driven even higher.

The downgrade could drive up the cost of European government debt as investors demand more compensation for holding bonds deemed to be riskier than they had been. Higher borrowing costs would put more financial pressure on countries already contending with heavy debt burdens.

 

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