Credit rating agency Standard & Poor's has hit the euro zone with a downgrade of half the countries in the single currency area, including formerly AAA-rated France. It also questioned the strategy of its political leaders for dealing with the euro zone debt crisis.
In downgrading nine of the euro zones 17 members, S&P said policymakers had not done enough to address the crisis and were even overlooking a key cause of the problem: sharp differences in economic competitiveness among countries that use the euro.
“As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues," the agency said.
While S&P gave higher grades to the European Central Bank for sustaining market confidence through emergency lending to euro zone banks, it said political initiatives thus far "may be insufficient" to address the crisis.
The mass downgrade follows S&P's decision last August to strip the US of its top credit rating.
European leaders, including Germany's Angela Merkel, have urged countries to tighten their belts with higher taxes and deep spending cuts to rein in massive budget deficits. But that has heightened market concern about their ability to grow their way back to health, pushing borrowing costs even higher for heavily indebted governments.
"In our view, it is increasingly likely that refinancing costs for certain countries may remain elevated, that credit availability and economic growth may further decelerate and that pressure on financing conditions may persist," S&P said.
France and Austria both saw their top AAA ratings cut one notch to AA-plus, while Malta, Slovakia and Slovenia also suffered one-notch downgrades. S&P dropped the credit ratings of Italy, Portugal, Spain and Cyprus by two notches.
The agency reaffirmed the ratings on seven other euro zone countries, including Germany and Ireland. But it said that of the 16 countries reviewed, all except Germany and Slovakia have negative outlooks, meaning more downgrades are possible in the next couple of years.
French Finance Minister Francois Baroin played down the impact of the move, saying it was "not a catastrophe".
The decision may add to the debt problems as it is likely to increase euro zone borrowing costs across the board.
The move could trigger a series of downgrades of large European banks, companies and government entities. This could include the European Financial Stability Facility, or EFSF, the fund created to rescue troubled euro zone countries. A downgrade of the EFSF could increase its borrowing costs, reducing its ability to protect the currency bloc's weaker members. n Friday.
