Euro plummets on Friday 13th as French downgrade looms
France's President Nicolas Sarkozy addresses his New Year wishes to the Justice representatives at the presidential Elysee Palace Friday. Sarkozy, who is facing a tough re-election battle, will also have to contend with the looming downgrading of France's triple-A credit rating.
Photograph by: Charles Platiau, AFP/Getty Images
PARIS — Standard & Poor's imminent downgrade of eurozone economic giant France's triple-A credit rating sent stocks sliding and the euro plummeting on a grim Friday 13th for the single currency.
In Brussels, EU government sources told AFP the ratings agency had warned members of the bloc that France would be downgraded by one notch, while fellow top-line creditors Germany, Luxembourg and the Netherlands would be spared.
"The Standard & Poor's downgrade (for France) is by one notch," one of the sources said. The credit rating agency had indicated in December that a cut of two notches could have been applied to the eurozone's second biggest economy.
The downgrade could force France's borrowing costs up, at a time when it has already been forced to impose austerity measures to control its deficit, and is a political humiliation for President Nicolas Sarkozy.
Sarkozy faces a tough re-election battle in less than 100 days and reportedly told allies last month: "If we lose the triple-A, I'm dead."
France's budget minister and government spokeswoman Valerie Pecresse refused to confirm the imminent downgrade, insisting: "France is a safe investment."
But opposition Socialist lawmaker Jean-Marie Le Guen branded the loss of the triple-A "a triple failure for Sarkozy", amid charges from the left that the president's tax cuts had left France more exposed than its neighbours.
Belgium, already two ranks below the top rating at double-A, will also remain steady. The official was not able to comment on whether the eurozone's other triple-A powers, Finland and Austria, were safe.
The Financial Times reported on its website that France and Austria would both by downgraded by one notch to AA+.
The single currency fell back to $1.2638, a 16-month low, while London's FTSE 100 closed down 0.46 per cent, Frankfurt's DAX closed down 0.58 per cent and in Paris the CAC 40 dropped 0.11 per cent by the end of trading.
American stocks also fell on opening. S&P was expected to confirm the downgrade after Wall Street closes at 2100 GMT.
And there was further bad news from debt-wracked eurozone minnow Greece, when a group representing major private lenders said they had failed to reach an agreement to slash its debt burden.
Talks on a Greek write-down have "not produced a constructive consolidated response by all parties," the Institute of International Finance said.
The proposed deal would have seen banks taking a 50 per cent "haircut" on Greek debt, which would remove about 100 billion euros ($127 billion) from Athens' massive burden and avoid a full-blown default.
"Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach," the IIF said, in a statement issued in Washington.
"There is extreme tension," a source in Athens confirmed to AFP. "All parties involved in this crucial negotiation ought to be aware of this very grave condition and assume their responsibilities to avoid the worst."
European shares and the euro had been climbing before reports began.
"The markets are in a delicate situation at the moment and, as with all delicate situations, investors need to tread carefully," Spreadex trader Simon Furlong told AFP.
"Any further downgrades to eurozone countries, especially ones of the likes of France and Germany would be a devastating blow for European leaders ahead of the European summit at the end of the month."
European leaders are due to meet in Brussels on January 29 to nail down details of a fiscal pact designed to reassure bond markets that their deficit reduction plans are on course and their debts safe.
Earlier this week, ratings agency Fitch offered markets reassurance that it did not plan to downgrade France's top triple-A credit rating in 2012, unless the country suffered major economic shocks.
But Standard & Poor's still had the eurozone bloc under scrutiny and — while the firm did not confirm that it was to act after markets closed on Friday — the reports seemed to have ended the optimism.
France had been on notice that its triple-A debt rating was on the line, amid fears over its large public deficit and its own banks' exposure to even riskier sovereign debt in eurozone partners Greece and Italy.
Earlier Friday, Italy raised 4.75 billion euros ($6.09 billion) at mostly lower rates in a bond auction, reflecting what was then still improved market confidence and European Central Bank efforts to boost eurozone liquidity.
German Foreign Minister Guido Westerwelle said he would travel to Greece on Sunday for talks on the crisis,taking with him a message of "encouragement" and "expectation", Berlin announced.
Meanwhile, German Chancellor Angela Merkel's spokesman said she will host the leaders of Portugal, Sweden and Austria next week for informal talks on the eurozone debt crisis and fiscal integration, her spokesman said.