Rumours of French credit rating cut by S amp P sends stocks and euro over 1 lower

Stock markets and the euro were sent tumbling in afternoon trade on Friday as rumours emerged that Standard and Poor’s was imminently preparing to downgrade a host of eurozone countries’ sovereign ratings including that of France.

The FTSE 100 lost 25 points and the euro was down by over 1% against the dollar, as traders sold the single currency in favour of safe haven asset classes.

Rumours had been swirling throughout much of the afternoon and this sent both stocks and the single currency heavily lower. Rumours gathered pace when Reuters quoted a eurozone source saying that the S&P had planned to cut several countries’ credit rating later in the day, but that this would not include Germany. French TV channels also reported widespread stories that France had indeed seen its credit rating citing government officials.

Despite the lack of confirmation from the S&P, traders wasted little time in downsizing their amount of risky assets associated to France, Europe and the sovereign debt crisis. This meant that financial stocks reversed their earlier day’s gains to trade in negative territory and there were also strong bearish moves in the euro, which hit a new 16-month low against the US dollar, losing 1.2% on the day.

No surprises
In truth, were there to be a French downgrade by the S&P tonight it would not in the slightest bit be a surprise and has been long rumoured in the markets ever since the EU Summit in December. Back then the S&P placed 15 of the 17 eurozone countries on watch for a possible downgrade and the markets have been awash with rumours for weeks that France’s rating could be cut before the end of January. As a result, today’s euro and stock market weakness could have been much more severe as many traders had started to price in a rate cut from Standard and Poors’ given their firm rhetoric towards concerns over the top notch ratings and the lack of significant progress made at the last EU Summit.

A rate cut would be significant nonetheless. First and foremost, it would be a big sign from the S&P that money with France is no longer at the supreme safe levels to which many investors have grown accustomed. Secondly, this could impact France’s ability to seek funding and the premium levels to which they pay lenders. Thirdly, it could impact France’s contribution to the EFSF and indeed the EFSF itself, whose rating will be affected by any move in the rating of its key creditors, increasing dependency on Germany who has already indicated a stubborn resistance to increase its contributions to containing the crisis. But more so, this could trigger a marked escalation in the sovereign debt crisis and the contagion effects from the so called PIIGS nations (Portugal, Italy, Ireland, Greece and Spain) to one of the two the powerhouses of the eurozone, France.