France loses its AAA rating

Friday 13th was indeed an inauspicious day for France, as their AAA credit rating was downgraded by Standard & Poor. A nation’s rating is meant to express its creditworthiness, which buyers of sovereign debt use to assess where to invest.

The move had been prophesied for some months by commentators and even by the French government themselves, who downplayed the possibility. But the fact that it has actually happened has sent shock waves through financial markets.

News of the downgrade initially broke in Germany, which is now the only Eurozone country that can boast the AAA rating. Germany has also got the upper hand in terms of the clear financial superiority in Eurozone negotiations, although it will also end up writing more of the cheques.

The real economic consequences of the downgrade are yet to be felt in France, where growth(such that it is) continues to be slow and the deficit is still very large. Whilst French ministers have claimed that the move was not a catastrophe, share prices were sent spinning and the euro plummeted against the dollar (although the other Eurozone countries whose ratings were downgraded can take some of the “credit” for that).

With less than 100 days until French elections, the political repercussions of the downgrade may be grave for President Sarkozy, who had described the treble A label as the “Holy Grail”. Having based his image on being the man who has the power to steer France through these challenging economic times, the decision could not have come at a worse time. Millions of French citizens are unemployed and millions more are finding it tough to meet rising living costs.

What has led to the downgrade? Austerity measures taken by the French government to cure that nation’s problems have failed to make much of a dent in its deficit. But the country’s persistence in standing shoulder to shoulder with its euro buddies has also cost the nation dear.

The Frenchman on the street can expect to see the effect trickle down through the various layers of society. Local government organisations, for example, are reputed to have taken out large loans which will become more expensive, as will borrowings for French businesses.