France’s Credit Rating Down, Greece Nearly Out

Nine eurozone nations had their credit rating downgraded by ratings agency Standard & Poor’s (S&P) on January 13, causing the euro to fall to its lowest level against the dollar since 2010. France and Austria lost their flawless aaa ratings and are now rated AA+. Portugal’s and Cyprus’s ratings were cut to “junk.”

The market reaction to these downgrades was relatively weak, mainly because investors were expecting them. “A one-notch downgrade for France was completely priced in, so no negative surprise here, and quite logical after the United States got downgraded,” said Global Equities’ David Thebault.

Greece posed a potentially bigger threat to the European Union after a breakdown in talks over its debt threatened to deny Greece the next stage of bailout cash.

As a condition for receiving the money, Greece has to negotiate a “haircut” from its creditors—a voluntary agreement for them to forgive a large chunk of its debts.

Naturally, the creditors aren’t keen to do this. But forcing them to accept losses could, according to the New York Times, “unleash violent market reactions that could conceivably produce another market cataclysm like the 2008 bankruptcy of Lehman Brothers and throw the world into another recession.”

During negotiations last Friday, one body representing the creditors announced a “pause for reflection”—stoking fears that Greece was having trouble forming an agreement.

But even if it does manage to, the European Central Bank and the International Monetary Fund are not sure they want to give Greece the loan. The New York Times says they “have come to believe that the country has neither the ability nor the will to carry out the broad economic reforms it has promised in exchange for aid” and that “they are even prepared to withhold the next installment of aid in March,” citing people familiar with the talks.

But Greece needs money by March 20—when it must pay €14.4 billion of debt. It has a lot of hoops to jump through before then to get the cash. Matina Stevis writes in the Wall Street Journal: “It’s difficult to estimate how long each of the above steps will take, but it’s clear that there are several things that could go wrong between today and March 19.”

Downgrades and troublesome Greek debt show that the eurozone hasn’t come close to solving its financial problems. Expect things to get worse, until Europe is forced to accept all of Germany’s conditions in return for a financial lifeline.