Finally its happened. France has lost its AAA status as S&P has followed through with its threat and downgraded them to AA+. It was announced to the nation on tv by French Finance Minister Francois Baroin. Rumours flooded the markets that Frances neighbours were also in danger of being downgraded shortly. S&P had warned in December that 15 eurozone countries were at risk.

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.”

On the positive side bond auctions this week for Spain and Italy had gone well as Ireland announced today that it hoped to return to the bond market later this year.

Earlier Friday, Italy had capped a strong week for government debt auctions, seeing its borrowing costs drop for a second day in a row as it successfully raised as much as euro4.75 billion ($6.05 billion).

Spain and Italy completed successful bond auctions on Thursday, and European Central Bank president Mario Draghi noted “tentative signs of stabilization” in the region’s economy.


At Friday’s Italian auction, investors demanded an interest rate of 4.83 percent to lend Italy three-year money, down from an average rate of 5.62 percent in the previous auction and far lower than the 7.89 percent in November, when the country’s financial crisis was most acute.

While Italy paid a slightly higher rate for bonds maturing in 2018, which were also sold in Friday’s auction, demand was between 1.2 percent and 2.2 percent higher than what was on offer.

The results were not as strong as those of bond auctions the previous day, when Italy raised euro12 billion and demand was strong for a sale of Spanish debt.

Source: Associated Press