Austerity Fails: Eurozone Countries in Mass Downgrade

The Guardian today: Europe has been plunged into a fresh crisis after France was stripped of its coveted AAA credit rating in a mass downgrade of nine eurozone countries by the ratings agency Standard & Poor's.

S&P said austerity was driving Europe even deeper into financial crisis as it also cut Austria's triple-A rating, and relegated Portugal and Cyprus to junk status.

Paul Krugman of the New York Times writing on his blog this morning:

S&P's downgrade of a bunch of European sovereigns was no surprise. What was somewhat surprising -- and which went unmentioned in almost all the news stories I've read -- was why S&P has gotten so pessimistic. From their FAQs:

We also believe that the agreement [the latest euro rescue plan] is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU's core and the so-called "periphery". As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.

And today we read about the response:

German chancellor Angela Merkel has called on eurozone governments speedily to implement tough new fiscal rules after Standard & Poor's downgraded the credit ratings of France and Austria and seven other second-tier sovereigns.

Still barreling down the road to nowhere.

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Helen Lewis-Hasteley writing in the UK's New Statesman:

France lost its AAA rating -- the highest possible -- and moved to AA+, as did Austria, while Portugal and Cyprus were downgraded to junk status. Italy, Spain, Malta, Slovakia and Slovenia also saw their ratings cut.

S&P said that its decision reflected the fact that austerity "risks becoming self-defeating". Markets fell on the news, with the FTSE closing 26 points down at 5636.

Britain still has a triple-A rating from Standard & Poor's, which has caused some adverse comment by Eurozone politicians. Michael Fuchs, deputy leader of Angela Merkel's Christian Democrat party, said: "Standard and Poor's must stop playing politics. Why doesn't it act on the highly indebted United States or highly indebted Britain?"

The decision will cause a headache for French president Nicolas Sarkozy, who is running for re-election this year. Today's Liberation had some fun at his expense (click here for their front page).

Yesterday's Guardian live blog provides a helpful summary of all the major developments, while Samira Shackle blogged in December about S&P's threat to downgrade all 15 eurozone countries, and why that matters.