S&P Downgrades Several Eurozone Countries

Standard and Poor's has downgraded the credit ratings of nine eurozone countries, including France. S&P has had 15 eurozone countries on a "negative credit watch" for weeks, so the announcement Friday wasn't much of a surprise. Analysts, though, are concerned about possible ripple effects. Audie Cornish talks with NPR's John Ydstie for more.

Copyright © 2012 NPR. For personal, noncommercial use only. See Terms of Use. For other uses, prior permission required.

MELISSA BLOCK, HOST:

This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block.

AUDIE CORNISH, HOST:

And I'm Audie Cornish. It's been expected since December, and today it happened: a credit downgrade in Europe. Nine European countries were hit. Most notably, France lost its top AAA rating, and Italy was taken down two notches. The downgrades will likely make the task of solving Europe's debt crisis even harder. NPR's economics correspondent John Ydstie joins us to sort through what happened. John, tell us, what are the other countries that were downgraded?

JOHN YDSTIE, BYLINE: Well, first of all we should say it was the credit rating agency Standard & Poor's that issued the downgrades. The other two big credit rating agencies, Fitch and Moody's, haven't followed suit. In addition to France being downgraded one notch and Italy by two notches, Austria also lost its AAA rating, and Spain was also downgraded two notches, as was Portugal. On the other hand, Germany and The Netherlands, along with Finland, retained their AAA ratings.

CORNISH: Now, the thing is the S&P warned back in December that this might happen, so why are markets surprised?

YDSTIE: Well, that's a good question. In some ways, I think S&P is simply confirming what the market has already told us. In fact, in past weeks, France and Italy were already paying higher interest rates to borrow money as if their credit ratings had already been lowered. And there were no big changes in those rates today. Stock markets fell a bit in Europe and in the U.S., though only moderately today, less than 1 percent. So it would be easy to say this is formalizing what we already know. But I talked to Mohamed El-Erian, he's the co-CEO of the big bond fund PIMCO, and he suggested we shouldn't be too complacent.

MOHAMED EL-ERIAN: The easy thing to say is, no, we're not worse off. After all, S&P had signaled back in December. But there's a difference between signaling and doing something. And when you actually do something, you trigger second- and third-round effect.

CORNISH: John, second- and third-round effects, what might that be?

YDSTIE: Well, for one thing, it might complicate the bailout mechanism the EU has put in place to handle problems like Greece. The EU rescue fund depends on the guarantees of the EU countries. And France is the second biggest economy in Europe, it's been downgraded. That could complicate funds. That could complicate things for the fund as it tries to raise money. Countries like Japan might not lend unless they are paid a higher interest rate. Or potential lenders might just change their mind and not participate in the emergency fund at all.

Also, the downgrade affects contracts. Let's say you're a borrower and your contract with your lender requires you to have collateral of AAA bonds, like France's old bonds. Well now they're not AAA, so you're not living up to the contract. And there could also be political effects in Europe.

CORNISH: Political effects, especially for someone like maybe French President Nicolas Sarkozy?

YDSTIE: Well, that's certainly a possibility. But there could also be broader effects in terms of relations within the European Union. Remember, Germany retains its AAA rating and France is diminished. Now, throughout the development of the European Union and the euro currency, France and Germany have been pretty much equal partners. But as one European analyst told me today, this action makes France less like Germany and more like Italy, so it could cement Germany's position in the driver's seat in Europe. France's finance minister tried to put the best face on it today. He said, this is not a catastrophe. It's an excellent rating. That is the new AA+ rating. But he acknowledged it's not good news.

CORNISH: NPR's economics correspondent John Ydstie. John, thanks so much for talking with us.

YDSTIE: You're welcome.

Copyright © 2012 NPR. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to NPR. This transcript is provided for personal, noncommercial use only, pursuant to our Terms of Use. Any other use requires NPR's prior permission. Visit our permissions page for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR's programming is the audio.

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.