French President Nicolas Sarkozy heads to Madrid on Monday for talks with Prime Minister Mariano Rajoy following a Standard and Poor's downgrade of nine eurozone nations that saw France lose its top "AAA" rating and a two-notch downgrade for Spain.
AFP - France's President Nicolas Sarkozy was headed to Spain for crisis talks on Monday as two of the biggest losers in Standard and Poor's mass eurozone downgrade prepared their response.
Sarkozy, who saw France stripped of its top AAA credit rating on Friday, was to receive an award from King Juan Carlos in Madrid before holding a working meeting with Prime Minister Mariano Rajoy.
Spain and Italy were hit by double downgrades in the S&P report card, piling pressure on governments and the euro in the run-up to an EU summit January 30 that is supposed to confirm details of an austere new fiscal pact.
The euro remained under pressure but edged up to $1.2680 in early London trading from $1.2677 in New York late Friday, when it plunged to a 17-month low at $1.2624 -- a level last seen in August 2010
European stock markets stabilised after opening slightly down but the true test of the effect of France's humiliating downgrade will come on Thursday, when it conducts its first large-scale bond auction as a AA+ economy.
France will try to sell between 7.5 billion and 9.5 billion euros in bonds -- with maturities of between two and 28 years -- and markets will be keen to see how much interest Paris will have to pay to find buyers.
If Sarkozy's government finds itself saddled with high yields in the wake of its downgrade it will call into question the credibility of his deficit reduction plan and plunge the eurozone into further turmoil.
Already, by slapping nine eurozone members with downgrades and putting all the others bar Germany on notice that they are under scrutiny, S&P has holed the European Financial Stability Facility near the waterline.
The EFSF is supposed to act as a bail-out fund to back-stop weak economies, but it owes its own credit-worthiness to its triple-A backers and now faces a downgrade of its own.
Many European leaders are furious over S&P's decision and are scrambling to restore their credibility ahead of the summit -- the latest in what is now a long line of emergency "save the euro" meetings.
"Let there be no mistake: this is not a crisis of the euro as a currency," the European Union's internal market commissioner Michel Barnier told delegates to the Asian Financial Forum on Monday in Hong Kong.
"The euro is here to stay. In the last 10 years the euro has proven itself as a true world currency ... And despite the difficulties, it remains strong.
"The real crisis the eurozone faces right now is a crisis of confidence. Our political unity and our determination and our ability to rectify what is wrong ... are being tested," he said.
British finance minister George Osborne, who was also in Hong Kong, said the downgrade should spur reform. Britain is outside the eurozone but is keen to see its neighbours pull through the crisis and restore growth to Europe.
"No one likes to see credit ratings downgraded but what matters much more are the actions Western countries take to restore their own fiscal sustainability," he said.
Spain -- where on Saturday Rajoy announced an "astronomical" figure of 5.4 million jobless -- now has one of the eurozone's weakest credit ratings, with S&P bumping it from AA minus to A.
"The government I lead knows perfectly well what must be done to improve Spain's reputation and to create growth and jobs and we are going to do it," Rajoy told a rally of his Popular Party on Saturday.
Spain and Italy have struggled in recent months on the financial markets on fears they could be the next eurozone states to need a bailout after Greece, Ireland and Portugal, despite promises of tough austerity measures.
On Sunday, in his first public reaction to the downgrade, Sarkozy appealed for calm and said he would get France back on track.
"The crisis can be overcome provided that we have the collective will and the courage to reform our country," he said. "We must resist. We must fight. We must show courage. We must remain calm."
Date created : 2012-01-16