Sovereign debt: The euro zone’s bailout fund may see a dramatic rise in its cost of borrowing following Standard & Poor’s downgrade of several countries’ debt scores on Friday.
The US-based firm lowered its long-term ratings of nine euro area states, most notably downgrading France one level down from the highest AAA score. Austria also lost its AAA rating, but Finland, Germany, Luxembourg and the Netherlands kept their top notch marks.
However, the outlook on 14 euro countries--including France, Luxembourg and the Netherlands--remained negative, “indicating that we believe that there is at least a one-in-three chance that the rating will be lowered in 2012 or 2013,” S&P said in a statement. Only Germany and Slovakia are expected to retain the highest credit rating.
Investors demand higher yields when buying lower rated government debt.
S&P said it made the downgrades because the actions of European leaders “in recent weeks may be “initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone.”
However, over the weekend competitive ratings agency Fitch told French TV news channel France24 and the Reuters news agency that it did not expect to downgrade French sovereign debt this year.
Europe’s bailout fund--the Luxembourg-based European Financial Stability Facility--is backed by euro zone governments. It relies in large part on the support of AAA-rated member states to keep its own financing costs down since only four euro countries now have AAA status.
In December the EFSF had its AAA rating placed on negative credit watch by Standard & Poor’s. The move happened less than 24 hours after the credit agency placed all of its then-six AAA backers on S&P’s negative watch list.
TEXT: Aaron Grunwald · PHOTO(S): European Commission archives