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Downgrade of France's credit rating dashes uplifting week for eurozone

Unexpectedly successful bond auctions for Spain and Italy and additional lending from the European Central Bank generated speculation about a turnaround  – until S&P announced it had downgraded France.

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A downgrade of France’s triple-A credit rating brings not just a sour note but mild shock waves inside Europe’s financial capitals, coming at the end of a week that seemed to bode well for chances of staunching the eurozone crisis.

The ratings agency Standard and Poor’s is preparing to drop France’s rating to double-A+, confirmed this evening by Finance Minister Francois Baroin, who said it “is not good news,” but noted that the reduced rating will match that of the US, downgraded last summer following a standoff on raising the debt ceiling. 

The downgrade raises the question of whether the eurozone can rely entirely on the German-led prescription of austerity to battle a debt crisis that turns three years old this month.

A lower rating will likely mean higher borrowing rates for France, the No. 2 economy in Europe. The rating may also decrease confidence in France’s guarantees to the European Financial Stability Fund, created in 2009, which has been used to help bail out Greece, Portugal, and Ireland and to bolster a “firewall” to stop the European debt crisis fire from spreading to the core EU countries. 

The rating also raises the hurdle for French President Nicolas Sarkozy, who is fighting an uphill battle in the polls ahead of national elections this spring.  

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