All things being equal – S & P downgrades France and Austria

“Standard & Poor’s cuts credit ratings for France and eight other European nations

By Howard Schneider and Edward Cody, Friday, January 13, 5:19 PM

Standard & Poor’s imposed a sweeping cut to the credit standing of major European nations including France on Friday in an action that could further weaken the region’s finances and make life more expensive for governments as they fight to control a chronic crisis over public debt.

The action robs France and Austria of their prized AAA ratings, something the French government in particular had vowed to protect through recent measures to cut spending and raise taxes.

The fact that President Nicolas Sarkozy lost that battle could bode ill for the entire 17-nation euro-region — as well as for his own chances in an upcoming election. The effort to rescue countries like Greece and keep Italy from needing international help rests on the capacity of France, Germany and a cluster of smaller, economically successful countries to keep their economies on track and be able to borrow money at low rates.

The S&P action left the AAA rating of Germany, the Netherlands and Luxembourg intact.

But the fact that France may now be moving toward the more suspect camp of downgraded countries like Italy and Spain — also among the nine nations that S&P downgraded on Friday -- is another blow to the euro-region’s crisis management.

The ratings agency said its action was based on a broad reading of weak euro zone financial and economic conditions, coupled with what it judged as the “insufficient” steps taken by European leaders to address the situation.

Despite a plethora of summits, declarations and bailout deals, Europe has “not produced a breakthrough of sufficient size and scope to fully address the eurozone’s financial problems,” the ratings agency concluded. Political leaders, the agency contended, did not even fully appreciate the scope of a crisis that extends far beyond overspending in small countries like Greece to encompass the competitiveness of the euro zone itself.

The downgrade of France in particularly is evidence of the divergence taking hold between those European countries that still enjoy rock-solid faith on international markets and those whose economic and financial path is more questionable.

At the extreme, Greece, Portugal and Ireland have already required international help. The battle now is to prevent large nations like Italy and Spain from being engulfed in a crisis that U.S. officials consider a chief risk to the global economy.

A downgrade makes the euro region’s fight that much harder, likely raising borrowing costs for the affected countries as they try to raise hundreds of billions of dollars in international bond markets this year. France alone needs to borrow about $240 billion this year to finance its existing debts and annual deficit.

It could also affect the current AAA standing of the region’s bailout fund, the European Financial Stability Facility. S&P did not mention the EFSF in Friday’s ratings note, but said its evaluation of other European institutions, including banks and “government-related entities,” would be issued “in due course.””