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France loses top credit rating, government says
France was stripped Friday of its top-notch credit rating and rumors swirled in financial markets that its debt-burdened neighbors would be next, complicating Europe’s efforts to solve its financial crisis.
Finance Minister Francois Baroin told a French TV station that France had been downgraded by one notch by credit rating agency Standard & Poor’s. That would mean a rating of AA+, the same as the United States since it was downgraded last summer.
Rumors coursed through the markets that Austria and Italy could be downgraded next, perhaps as early as the end of the day’s stock trading in New York. S&P had warned 15 European nations in December that they were at risk for a downgrade.
Baroin said France had received a change to its rating “like most of the eurozone,” referring to the 17 European nations that use the euro currency, but there was no confirmation from S&P that any other nation had been downgraded Friday.
France is the second-largest contributor behind Germany to Europe’s financial rescue fund. The fund still has a rating of AAA, which means that it can borrow on the bond market at low rates.
The cut in the French credit rating may lead bond traders to raise borrowing costs for the fund, said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, a financial firm.
“There’s a legitimate reason to be concerned,” he said. “A weaker France means a weaker bailout fund.”
Stocks fell Friday as downgrade rumors reached the trading floors of Europe and the United States. But the declines were nothing like the wrenching swings of last summer and fall, when the debt crisis threw the markets into turmoil.
The Dow Jones industrial average in New York was down 0.5 precent. Stocks fell 0.6 percent in Germany, 0.5 percent in Britain and 0.1 in France, but each of those markets closed before Baroin made his announcement on French television.
Borrowing costs for the French government rose before the announcement. The yield on France’s 10-year government bond rose to 3.1 percent from 3 percent earlier. That is still less than the 3.36 percent rate on the same bond last week and far below the 6.6 percent that Italy has to pay to borrow money from bond investors for 10 years.
Germany, the strongest economy in Europe, pays a yield of just 1.76 percent. The United States 10-year Treasury note paid 1.85 percent Friday, down 0.08 percentage points — a sign that investors were seeking safety in U.S. debt.
The French government appeared to make a point of announcing the downgrade on its own terms, not S&P’s. France-2 television announced 10 minutes before its evening news program that Baroin would appear.
The finance minister said the downgrade was “bad news” but not “a catastrophe.”
“You have to be relative, you have keep your cool,” he said on France-2 television. “It’s necessary not to frighten the French people about it.”
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