In France, Pain of Rating Downgrade Is Especially Acute

Among the European countries that Standard & Poor’s declared less creditworthyon Friday, France stands out among the tarnished.

French President Nicholas Sarkozy
Getty Images
French President Nicholas Sarkozy

An S.& P. downgrade provides no truly new information about the euro zone’s debt struggle, now entering its third year. But the move at least symbolically places the crisis squarely on the doorstep of the Continent’s second-biggest economy after Germany — which retains the AAA credit rating of which France can no longer boast.

Keeping that top credit rating had long been a badge of honor for France — and a political point of pride for President Nicolas Sarkozy, who now enters a difficult re-election campaign with a stigma that his opponents quickly moved to exploit.

News of the downgrade blared from French airwaves and on Web sites, as the finance minister, François Baroin, declared that the event was “not a catastrophe.” Members of the opposing Socialist party wasted no time painting a gloomier picture. “He’s the president of the degradation of France,” Martine Aubry, the party’s secretary, said of the French president.

Mr. Sarkozy had often boasted of France’s gilt-edged standing, and the looming prospect of its loss had recently become a prime topic of political discussion, a hot issue on talk shows and fodder for comedians and political cartoonists.

But whether the S.& P. downgrade will have a marked effect on France’s cost of borrowing money is something only the coming months and weeks will tell.

Because the demotion had been widely anticipated, French officials have said the impact will be manageable. French debt, and that of most other euro zone governments, was already trading as if a downgrade had happened. Yields on French 10-year government bonds, which rose slightly Friday and stood at 3 percent, have been trading more than a percentage point above Germany’s, the European benchmark. Germany’s interest rate fell slightly to 1.8 percent Friday.

“It isn’t the end of the world” for France, said Jacob Funk Kirkegaard, an economist at the Peterson Institute for International Economics in Washington. “There will be a lot of terrible headlines,” he said in an interview before the official announcement of an S.& P. downgrade, “but it’s not going to cause French bonds to decline a lot on a persistent basis.”

S.& P. kept a negative outlook for France, citing its high government debt, and a rigid labor market that has helped keep the unemployment rate high, at around 9 percent. The agency said it could downgrade France yet again this year or next if efforts at budget consolidation strategy and structural reforms faltered.

The downgrade will raise the nation’s borrowing costs at a time when it is trying to reduce around 1.7 trillion euros of debt.

In Paris, for example, a sparkling light show that illuminated the Eiffel Tower for 10 minutes every hour after dark has been cut to 5 minutes. Cities and municipalities will feel a similar pinch. Some have already begun adjusting to tighter financial constraints.

France is one of the major financial backers of the European rescue fund, the European Financial Stability Facility , which is meant to prevent the credit contagion that began in Greece from spreading to large countries like Italy and Spain.

The price of its rescue fund, whose borrowing costs depend in part on the credit ratings of its contributing nations, will now probably rise because of the downgrades to France and others. Higher costs could make the fund less effective in stemming the euro crisis.

Many French leaders have noted that S.& P.’s downgrade of the United States’ AAA credit rating in Augustdid not stop investors from flocking to Treasury securities. To a large extent, though, the United States has a special safe-haven status, as the world’s largest economy and as a financial power outside the euro zone, which France does not.

At the time S.& P. issued the American downgrade last summer, it had warned that France — of all the major economies that still held the highest credit grade — was the most vulnerable because its finances were being eroded by the European crisis. That warning came as the stocks of two of the country’s biggest banks — Société Générale and BNP Paribas — were being hammered by investors amid rising concern that they had been weakened by the crisis. The shares of both banks have continued to decline since then. Many French and European officials have accused the ratings agencies of fanning the flames. As Europe’s crisis wore on, each time a troubled country — whether Spain, Ireland, Portugal or Greece — announced a new program to improve its finances, they said, S.& P. or Moody’s or Fitch crushed confidence by issuing fresh downgrades or warnings shortly thereafter.

French officials were livid in November after S.& P. erroneously sent out an e-mail saying that it had already lowered the rating on France’s sovereign debt. The company quickly apologized, but Mr. Baroin, the French finance minister, opened an investigation.

Until December, Mr. Sarkozy had warned that a downgrade would bite, especially as he outlined two back-to-back austerity programs meant to reduce France’s budget deficit of nearly 6 percent of gross domestic product — as well as pare debt of 87 percent of G.D.P., the highest of any AAA-rated European nation.

But with his main political rival, the Socialist candidate François Hollande, turning up the heat in the campaign, Mr. Sarkozy reversed course, telling voters since then that a downgrade would be manageable.

That may be: French banks and others in Europe that hold piles of French government bonds are raising tens of billions of euros to meet new regulatory requirements to guard against a worsening of the crisis.

And while the credit rating of Europe’s current rescue fund may also be cut, European officials have already teed up a replacement, the European Stability Mechanism, which does not depend as much on credit ratings. That is because governments would pump taxpayer money directly into the fund.

Nonetheless, France will have to work to restore its financial luster, especially if it is subsequently downgraded by other ratings agencies. French officials say their priority now is to demonstrate that the euro area is solid, while also showing that France is working to improve its own finances.

Mr. Sarkozy’s austerity programs, including higher taxes on items like some food and beverages that kicked in across France recently, are aimed at whittling the country’s budget deficit to 3 percent of G.D.P. by 2015.