S&P Downgrades France, Italy, Among Several Others

Standard & Poor's (S&P) threw fuel onto the euro fire last week as the agency stripped France of its formerly pristine AAA credit rating. The country now has a AA+ rating, a single notch lower than the top-level AAA.

In addition to downgrading France, S&P took ratings actions on 15 other members of the euro zone: the long-term ratings on Italy, Portugal, Spain and Cyprus were lowered by two notches, the long-term ratings on Austria, Malta, Slovakia and Slovenia were, like France, lowered by one notch, and the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg and the Netherlands were affirmed.

The reason for the downgrades was uniformly related to lackluster policy reactions on the part of the continent's leaders. "Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone," said S&P in their announcement. "In our view, these stresses include: (1) tightening credit conditions, (2) an increase in risk premiums for a widening group of euro zone issuers, (3) a simultaneous attempt to de-lever by governments and households, (4) weakening economic growth prospects and (5) an open and prolonged dispute among European policymakers over the proper approach to address challenges."

While the downgrades are by no means appreciated by the ailing euro zone, S&P noted that the ratings still remain at comparatively high levels, with only three member nations below investment grade (Portugal, Cyprus and Greece). NACM Economist Chris Kuehl, PhD also noted that the downgrades could have bigger ramifications for the ratings agencies themselves, rather than for the countries receiving them. "It will be the rare set of leaders that will seek to please the ratings agencies instead of making the voter happy," said Kuehl. "As a matter of fact, the governments in Europe have been calling for restrictions on the ratings agencies, and this latest set of assessments will add fuel to that fire."

Outlooks for the 16 countries considered in this batch of ratings actions were largely negative, with 14 of them suffering from a one-in-three chance of another downgrade in 2012 or 2013. Only Germany and Slovakia's ratings outlooks were changed, both of them upgraded from negative to stable.

Jacob Barron, CICP, NACM staff writer