Stock markets and the Euro traded lower Friday as Greek debt swap talks were put on hold and France’s Finance minister confirmed that Standard & Poor’s has downgraded the country’s credit rating.
Francois Baroin confirmed media reports that the rating has dropped one notch from the top triple-A level to AA+. S&P was expected to announce the downgrades of more European governments after the markets closed. A downgrade would most likely increase the costs of borrowing.
Various reports said Germany and the Netherlands would keep their top ratings.
Earlier, representatives of private bondholders said crucial negotiations between the Greek government and its private creditors on a deal needed to avoid default had been paused for reflection, which raised concerns the negotiations were close to collapse.
The talks are aimed at renegotiating the face value of bonds Greece has issued in order to reach an agreement on how much of a haircut the banks will take voluntarily.
By making the deal voluntary, Greece would dodge a legal default, which risks triggering a much deeper financial crisis that could curtail European lending.
If Greece's default is disorderly — with the various lenders uncertain of how much they will be repaid — the risk is that banks will become unwilling to lend because they can no longer count on enforcement of the rules that protect lenders when borrowers fail to meet the terms of their loans.
More immediately, the bond swap aims to reduce Greece's debt by €100 billion (130 billion dollars) and is a key part of a second, €130 billion (169bn) international bailout installment.
European markets closed lower, with London's FTSE 100 off 0.46%, Frankfurt's DAX down 0.58% and the Paris CAC 40 closing off 0.11%. The Euro fell to a 17-month low, trading down 1.2 per cent at 1.2665 US.
Traders had earlier been relieved at successful government bond auctions in Italy and Spain, which had raised hopes that policy-makers may finally be getting a grip on Europe's debt crisis after months of procrastination and indecision.
On Friday, Italy had seen its borrowing costs drop for a second day in a row as it easily raised €3 billion.
Last 5 December S&P warned it might downgrade 15 members of the Euro zone. It later said it might also downgrade the European Union and the EU bailout fund. At the time, it said it was reviewing the long-term borrowing ratings for Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands, and both the short-and long term ratings on Ireland, Italy, Malta, Portugal, Slovak Republic, Slovenia and Spain, as well as the short-term ratings of Cyprus.
S&P cited a growing reluctance of banks to lend, rising bond yields, continuing disagreements among European leaders on how the resolve the region’s debt crisis, high government and household debt and the rising risk of recession.