France loses AAA rating, Greek crisis worsens

France, the second-biggest European economy lost its top-notch credit rating late on Friday as Standard & Poor’s Rating Services downgraded the long-term ratings of nine euro zone countries on concerns related to insufficient policy measures taken by these countries to tackle the ongoing economic crisis. Germany is the only major country in the Euro zone that was spared.

S&P lowered France’s rating one notch from AAA to AA+ while debt-laden countries like Italy, Spain and Portugal saw their ratings cut by two notches each.

Market experts in Mumbai believe the downgrades were expected and therefore won’t come as much of a shock. “The credit-rating agencies had been indicating downgrades for euro zone countries for  months now and to that extent the markets have factored in these events,” said Saurabh Mukherjea, head of institutional equities at Ambit Capital.

Experts are, however, more worried about a possible Greece default after talks between the government and creditors failed.    

“There’s a fight going on in the market,” said Ramesh Damani, member of the Bombay Stock Exchange, alluding to a tussle between bulls and bears.

The difference in bond yields of Germany and France, which till Friday were at the same levels, are an indicator that the debt markets were expecting the downgrades. While the yield on Germany’s 10-year bund was at 1.765%, those on France’s bond traded closer to 3.07%.

The event is not likely to cause a major rise in the French yield, believe experts.

“We have seen that downgrades really don’t affect the bond markets that much anymore … they are rather driven by central bank action. With the European Central Bank aggressively buying bonds, German yields in the shorter duration may not rise much, while the longer yields may inch up slightly over time. As long as ECB’s mega injection of liquidity is on, investors’ confidence may not go down,” Mukherjea said.

The US markets, which were open when the news of possible downgrades surfaced, did not react too negatively, closing just a half a percent down.

However, some experts see the downgrades having an impact on the euro zone’s efforts to come out of its crisis, as borrowing costs may go up for these countries.

The European Financial Stability Facility (EFSF), which is funding rescue packages for Greece, Ireland and Portugal partially with bond sales, owes its AAA rating to guarantees from the region’s top-rated nations. “It will be interesting to see what the strategy will be regarding the EFSF,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “Downgrades could limit the volume of AAA rated EFSF paper that could be issued, or the EFSF could begin to issue non-AAA,” he added.