France confirms S&P rating downgrade of one point

France has lost its gold-plated AAA credit rating in another blow to the beleaguered euro zone economy, it was confirmed tonight.

Credit rating agency Standard & Poor’s (S&P) downgraded the euro zone’s second biggest economy in a move likely to push up France’s borrowing costs.

The French minister for finance said S&P had cut the rating by one point to AA.

The move is significant because France is partly responsible for underwriting the euro zone bailout fund, which is at the heart of efforts to ease fears of a euro zone collapse.

Earlier world markets fell as news emerged that the downgrade was about to be announced.

The FTSE 100 Index in London was down more than 1 per cent at one point, while Germany’s Dax, France’s Cac-40 and the US’s Dow Jones Industrial Average were all in negative territory. The euro declined against most currencies, including the pound.

Reports of a breakdown in talks between Greece and its banks to restructure its debts fuelled fears of a default and also drove markets lower.

Austria is also expected to be downgraded, which would leave just four of the 17 nations in the euro zone with the top-notch rating.

S&P, which announced in December that it had placed all the euro zone countries under review, is due to leave the AAA ratings of Germany, the Netherlands, Finland and Luxembourg untouched.

Meanwhile, reports of a breakdown in talks between Greece and its banks to restructure its debts fuelled fears of a default and also drove markets lower.

World markets fell on the speculation.

US bond prices and the dollar rose as investors sought safe haven, a day after the euro hit its highest in a week on strong demand at auctions for Italian and Spanish government debt. Underpinned by a flood of three-year loans to banks from the European Central Bank, Italy's three-year debt costs fell below 5 per cent for the first time since September, spurring hopes it would be able to make it through a looming refinancing hump.

But the tender raised less than half the €10 billion secured the previous day at far lower yields by Spain, the other major euro zone economy on the front line of the debt crisis.

"Clearly the fundamentals have deteriorated and several of the agencies have warned of this ... I think there's a very good risk (of downgrades) in the coming few weeks," said Mike Moran, director and senior foreign exchange strategist with Standard Chartered. "The theme is that we're shifting away from pressure from the southern peripheral economies and it's now creeping, it has been creeping, toward the northern European economies now as well over the past couple of months and this is another extension."

The debt turmoil weighed on trading and corporate deal-making at US bank JPMorgan Chase, which began the financial reporting season across the Atlantic with a year-on-year drop in quarterly income. Shares of JP Morgan Chase were down 3.4 per cent at $35.58.

The euro was last down 1.4 per cent at $1.2648 against the US dollar.

World stocks as measured by the MSCI World Equity Index were down 1.4 per cent, while US stocks were down nearly 1 per cent.

The Dow Jones industrial average was down 121.32 points, or 0.97 per cent, at 12,349.70. The Standard & Poor's 500 Index was down 12.65 points, or 0.98 per cent, at 1,282.85. The Nasdaq Composite Index was down 20.77 points, or 0.76 per cent, at 2,703.93.

The FTSEurofirst 300 index was down 0.6 per cent.

The pan-European FTSEurofirst 300 index of top shares fell 0.2 per cent to a provisional close of 1,016.38 points, after going as high as 1,026.81 and as low as 1,007.86.

The European Central Bank struck a cautiously optimistic note on the euro zone's outlook yesterday and left the door open to further interest rate cuts. ECB president Mario Draghi said in Frankfurt yesterday his strategy for battling Europe's debt crisis is starting to work and that there are "tentative signs" of economic stabilisation in the euro area.

Agencies