France's credit rating falls to AA+

For Nicolas Sarkozy, the president of France, the downgrade is a particularly severe blow with elections looming.

PARIS // The euro zone was plunged into deeper crisis last night as France was  among a number of member countries  to have their credit ratings downgraded in the latest setback for the single currency.

Speaking on France-2 television, the French finance minister François Baroin confirmed that France had been lowered by one notch from Triple-A. That would mean a rating of AA+, the same rating the United States has had since the Standard & Poor’s (S&P) ratings agency downgraded it last August.

Financial markets slumped after a series of reports described an announcement from S&P as imminent.

Austria and Slovakia were also included in the list of nations facing downgrades, while Germany and the Netherlands were said to have escaped the threat.

On a bleak day not only for the euro and hopes of solving the zone's crippling debt crisis, but for the global economy, talks in Athens on a possible debt swap to prevent Greece falling into default failed to produce agreement.

For Nicolas Sarkozy, the president of France, the loss of one notch, reducing the country's Triple-A rating to AA+, is a particularly severe blow with elections looming.

France goes to the polls in April and May to decide whether Mr Sarkozy should be granted a second five-year term. Even without the euro crisis, he was struggling to show himself capable of winning over a demoralised and deeply unimpressed electorate.

The two other Triple-A eurozone states, Finland and Luxembourg, kept their rating.

Doubts about the state of the French economy had already led to speculation that despite acting with Germany as a would-be doctor for eurozone woes, it was in danger of joining those in need of a cure.

Fears of a downgrade prompted Mr Baroin to claim last month that the British economy was in an even worse state than France's. In comments that angered London, he said that if the French credit rating was cut, then the UK should face similar action.

But Mr Sarkozy seemed to become increasingly resigned to France being affected. Having previously pledged to fight to keep the Triple-A rating, he told the daily newspaper Le Monde in an interview that the possibility of a downgrade was possible after all: "It would be one more difficulty, but not insurmountable."

Mr Sarkozy held crisis talks with key ministers ahead of the anticipated downgrade, AFP reported. The prime minister, Francois Fillon, Mr Baroin and the budget minister, Valérie Pécresse, went into the talks at the Elysee after EU government sources said France was to lose its prized AAA rating.

There was no immediate official comment in Paris on the reports, although Ms Pécresse had earlier insisted on BFM television that France was a safe country in which to invest. "It can repay its debt and the news concerning our deficit is better than expected," she said.

Even so, the news was greeted with gloom internationally, with the euro falling on currency markets and stocks falling around the world.

The euro fell by more than a cent to $1.2650 while improved performance by European stocks came to an abrupt end. Interest on 10-year bonds, a crucial barometer of international confidence or lack of it, rose in a number of countries, including Germany, generally seen as the most resilient of eurozone economies.

S&P had warned in December it was reviewing the ratings of 15 of the 17 eurozone members. France and Austria were seen as vulnerable because both country's banks had heavy exposure to sovereign debt.

Meanwhile, hopes of persuading banks and insurance houses to accept voluntary losses of 50 per cent on the value of Greek bond holdings were dashed in the stalled Athens talks, though more discussions will take place next week. Reuters quoted negotiators who had previously talked up the prospects of agreement as accepting that they were now less hopeful, threatening "catastrophic consequences" for Greece and Europe unless the resumed talks break the impasse.

A statement from the Institute for International Finance, negotiating on behalf of creditor banks, said: "Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach."

* With additional reporting by Reuters