PARIS – Standard & Poor’s swept the debt-ridden European continent with punishing credit downgrades Friday, stripping France of its coveted AAA status and dropping Italy even lower. Germany retained its top-notch rating, but Portugal’s debt was consigned to junk.
In all, S&P, which took away the United States’ AAA rating last summer, lowered the ratings of nine countries, complicating Europe’s efforts to find a way out of a debt crisis that still threatens to cause worldwide economic harm.
Austria also lost its AAA status, Italy and Spain fell by two notches, and S&P also cut ratings on Malta, Cyprus, Slovakia and Slovenia.
The downgrades on more than half of the countries that use the euro could drive up yields on European government debt as investors demand more compensation for holding bonds deemed to be riskier. Higher borrowing costs would put more financial pressure on countries already contending with heavy debt burdens.
“In our view, the policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” S&P said in a statement.
Stocks fell Friday as downgrade rumors reached the trading floors of Europe and the United States. But the declines were nothing like the wrenching swings of last summer and fall, when the debt crisis threw the markets into turmoil.
The Dow Jones industrial average in New York was down 0.5 percent. Stocks fell 0.6 percent in Germany, 0.5 percent in Britain and 0.1 in France, but each of those markets closed before French Finance Minister Francois Baroin gave first word of the country’s downgrade on French television.
Earlier Friday, the euro hit its lowest level in more than a year and borrowing costs for European nations rose.
Some analysts downplayed the impact of the downgrades.
“It’s going to create bad headlines for a day or two,” said Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics. But “there’s no underlying new information. … This will be quickly forgotten.”
Still, the cut in the French credit rating may lead bond traders to raise borrowing costs for the financial rescue fund, said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, a financial firm.
“There’s a legitimate reason to be concerned,” he said. “A weaker France means a weaker bailout fund.”
France’s downgrade to AA+ lowers it to the level of U.S. long-term debt, which S&P downgraded last summer. S&P had warned 15 European nations in December that they were at risk for a downgrade.
France is the second-largest contributor behind Germany to Europe’s financial rescue fund. The fund still has a rating of AAA. That means that it can borrow on the bond market at low rates.
Borrowing costs for the French government rose before the announcement. The yield on France’s 10-year government bond rose to 3.1 percent from 3 percent earlier. That is still less than the 3.36 percent rate on the same bond last week and far below the 6.6 percent that Italy has to pay to borrow money from bond investors for 10 years.
Germany, the strongest economy in Europe, pays a yield of just 1.76 percent. The United States 10-year Treasury note paid 1.85 percent Friday, down 0.08 percentage points – a sign that investors were seeking safety in U.S. debt.