The markets have been thrown into turmoil this afternoon on the news that Standard & Poor’s will downgrade the credit ratings of several eurozone countries at 8pm tonight. Among them is France, which is set to lose its cherished AAA rating, forcing it to pay more to finance its debt. Austria is also expected to lose its AAA rating.
Nicolas Sarkozy has previously attempted to minimise the potential impact of a downgrade, calling it “not insurmountable” in an interview published with Le Monde.
“If rating companies pull it, we’ll face the situation coolly and calmly,” he said. “It would be an additional difficulty but it’s not insurmountable. What is important is the credibility of our economic policy and our strategy of reducing spending.”
But the real danger is that this will also lead to a downgrade of the European Financial Stability Facility, the vehicle funding rescue packages for Greece, Ireland and Portugal, which owes its AAA rating to the credit-worthiness of the six countries who fund it – Germany, France, Holland, Austria, Finland, and Luxembourg. Should that happen, the risk of a calamitous Greek default would dramatically increase. The pressure would then be on Germany to finally allow the European Central Bank to act as a lender of last resort.
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