Downgrade Aftermath; Ratings Agency Recognizes European Economies Are Unraveling
Byline: THE WASHINGTON TIMES
Standard and Poor's (S&P) downgraded the credit rating of France and eight other eurozone countries on Friday. The ratings agency also stripped the AAA rating from the European Financial Stability Fund (EFSF), which supports indebted countries, leaving Germany as the only large European Union nation boasting a AAA score from all three major credit-rating agencies.
There may be little short-term consequence to the French downgrade. After all, markets barely reacted to the S&P's downgrade of the United States last year, and the markets haven't really been treating France as a AAA country. Investors have been demanding bond yields significantly higher for French debt than for German or U.S. debt. Of more importance are the EFSF downgrade and the ongoing Greek crisis.
Talks with private bondholders, in an effort to reduce the face value of Greek debt by 50 percent, have stalled, though they are expected to resume this week. Without an agreement with these creditors, Athens might not be able to pay $18.5 billion in bonds maturing on March 20, requiring yet another bailout from international lenders.
With both France and Austria degraded to AA+ status, if Fitch Ratings and Moody's follow S&P, the EFSF will lose some $227 billion in AAA guarantees, leaving it with a loan capacity of just $328 billion. Unless Germany sharply increases its contribution to the EFSF, something Germans have refused to do, the lender is either going to have to give out fewer loans or start issuing lower-rated and more expensive bonds. …