S&P downgrades France and Austria

The eurozone debt crisis returned with a vengeance on Friday as Standard & Poor’s, the credit rating agency, downgraded France and Austria – two of the currency zone’s six triple A rated countries – as well as seven nations not in that top tier, among them Italy and Spain.S&P, under political fire since it announced a review or eurozone debt in December, gave 14 of 16 countries – including France, Italy and Spain – a negative outlook, which it said meant a one-in-three chance for each country of a further downgrade this year or next.“It is not good news ... but it is not a catastrophe,” said François Baroin, France’s finance minister. “It is not the ratings agencies that dictate the policies of France.”The downgrades reignited fears about the fiscal sustainability of the eurozone and the knock-on effect on its rescue fund, which could now lose its own triple A rating, reducing its firepower or forcing eurozone nations to increase contributions yet again. S&P said last month’s European Union summit, which saw eurozone leaders agree steps towards fiscal union, had “not produced a breakthrough of sufficient size” to overcome a crisis which had already forced bail-outs of Greece, Ireland and Portugal.Nonetheless, Germany kept its triple A rating, along with the Netherlands, Finland and Luxembourg. Classic Short Ugg Boots Germany and Slovakia, downgraded from A plus to A, were the only countries who were not deemed in danger of a further downgrade by the end of 2013.The agency’s move prompted an immediate political backlash.Olli Rehn, EU monetary affairs commissioner, called S&P’s decisions “inconsistent” and suggested they ignored the “decisive action” taken by the eurozone to commit to budget, structural and banking-sector reforms, and to a more powerful rescue fund.In words echoed by other countries, the German government said the eurozone’s determination to overcome the debt crisis stood “beyond question”, noting that markets had recently calmed “in appreciation” of the fact that this goal was realistic.Earlier, financial markets slid as news of the downgrade leaked and investors sold the euro, eurozone equities and sovereign bonds, especially from Italy and Spain – the latter move pushing down yields for German Bunds and US Treasuries, held to be havens. The downgrades came in lockstep with new problems for the eurozone on other fronts – debt-restructuring talks between Greece and holders of its debt broke down over how large bondholders’ losses should be, raising the spectre of a Greek default in March. In Frankfurt, the European Central Bank criticised the draft of a new fiscal discipline treaty for the euro area, saying that the latest version amounted to “a substantial watering-down” of tough deficit levels that could allow “easy circumvention of the [deficit] rule” by struggling governments. ECB endorsement of the pact had been seen as crucial, since one of the main purposes of enshrining tough new debt and deficit rules was to give the central bank more leeway to purchase the bonds of Italy and Spain more aggressively, lowering their unsustainably high borrowing costs. “These revisions in my view clearly run against the spirit of the initial general agreement on an ambitious fiscal compact,” Jörg Asmussen, an ECB executive board member, wrote in the letter obtained by the Financial Times. The downgrades – announced after US markets closed on Friday – come after the S&P in December warned the six triple A nations and nine others in the eurozone that it had put their creditworthiness on review as a result of the debt crisis and the worsening economic outlook. Cyprus, also downgraded on Friday night, was already on review, and Greece not under consideration.Ahead of the statement confirming the downgrades, the euro fell more than 1 per cent to a 17-month low against the dollar and early gains on European stock markets were erased. Sovereign bond markets were also rattled, with Italy and Spain’s borrowing costs creeping up again after several days of sharp drops. France’s 10-year bond yields edged up, to 3.05 per cent, while Germany’s 10-year bond saw its yield drop to 1.75 per cent as investors returned to safer assets. Italy was hit with additional charges for the trading of the country’s government bonds by clearing houses. LCH.Clearnet SA raised margin payments for conventional bonds of maturities ranging between 3.25 years and 30 years, and 2 per cent on all Italian index-linked bonds.