A trader in Paris watches a graph showing the euro's value decline. (Remy de la Mauviniere, Associated…)
Reporting from Los Angeles and Paris — Standard & Poor's stripped France of its coveted AAA credit rating and downgraded eight other Eurozone countries in a sign the continent's debt crisis has a way to go before being resolved.
The action, announced after U.S. markets closed Friday, was somewhat expected since S&P warned in December that it might slash the ratings. Investors already had priced in the downgrades, for the most part — major global stock indexes suffered only moderate declines, and French bond yields went largely unaffected.
But tremors from the downgrade could hamper a European rescue fund backed by $558 billion to stabilize the sovereign debt crisis. It also might have political reverberations for French President Nicolas Sarkozy's reelection campaign.
S&P announced that its rating of France — Europe's second-largest economy, behind Germany — was lowered one notch to AA+. The country now has the same credit rating as the U.S., which S&P downgraded in August.
"Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the Eurozone," S&P said in a statement.
In addition, the ratings company lowered Portugal's credit to junk status and knocked Italy and Spain down two notches. Austria, Cyprus, Malta, Slovakia and Slovenia also saw downgrades. Other countries that were being examined by S&P for a downgrade, such as Germany, Ireland and the Netherlands, went unscathed.
Larry Palmer, managing director at Morgan Stanley Smith Barney in Los Angeles, said the announcement could affect the Eurozone rescue package, which is largely funded by members such as France and Germany.
The European Financial Stability Facility is designed to use proceeds from bond issues for loans to Eurozone countries drowning in financial troubles. The program makes low-cost loans available to debt-burdened countries such as Ireland and Portugal.
"It's endemic of how different the situation in Europe really is," Palmer said. "It's going to be interesting to see what happens to Sarkozy and other leaders who implement austerity measures like the [rescue fund] and still get their credit rating downgraded."
Although French government ministers have been preparing the ground for an eventual loss of the coveted rating for weeks, the timing of S&P's announcement still took many analysts by surprise.
A week ago, France received some good news after Fitch Ratings Service announced it did not foresee downgrading France in 2012. Word of S&P's downgrade started spreading early Friday, and French ministers attempted to calm the markets.
"It's not good news, but it's not a catastrophe," Francois Baroin, the country's finance minister, said on French television.
Baroin, along with Prime Minister Francois Fillon and Budget Minister Valerie Pecresse, were summoned Friday evening to a crisis meeting with Sarkozy at the Elysee Palace. The downgrade is bad timing for Sarkozy, who in less than four months is expected to seek reelection for a second term.
"It's not the ratings agencies who dictate French politics," Baroin said, adding that there would be no new austerity plan. "All that can be done is being done."
Mark Williams, a former Federal Reserve Bank examiner who teaches at the Boston University School of Management, said that larger actions are needed.
"The credit downgrades point to a weakening banking system and an increased need of big European bank rescues," he said. "In 2012, Europe will experience the equivalent market turmoil that shook American financial firms in 2008."
Quincy Krosby, a market strategist at Prudential Financial, said global financial markets had been anticipating some kind of action. She said that's why global markets remained relatively strong despite the ratings downgrades.
France's CAC-40 closed slightly lower, falling 3.49 points, or 0.11%, to 3196.49. The broader Euro Stoxx 50 index dropped 7.84, or 0.33%, to 2338.01. In the U.S., the Dow Jones industrial average slid 48.96, or 0.39%, to 12422.06.
"The news has dripped into the market over the past month or so," Krosby said. "It's not as if this news comes out of the blue. Things would've been much more volatile if there was a bombshell."
How it plays out in U.S. markets will take some time. Markets don't open until Tuesday because of the Martin Luther King Jr. holiday Monday. S&P's downgrade of the U.S. credit rating last summer triggered volatility on Wall Street for weeks after the announcement.
"We have a three-day weekend ahead here," Krosby said. "When we come back, we'll see if cooler heads prevail or not. But I don't think analysts believe France is any less creditworthy today than it was yesterday."
Times staff writer Hennigan reported from Los Angeles. Special correspondent Willsher reported from Paris.