The eurozone was braced for more pain today amid reports that France is set to be stripped of its gold-plated AAA credit rating.
Credit rating agency Standard & Poor's (S&P) is widely expected to downgrade the eurozone's second biggest economy this evening in a move likely to push up the country's borrowing costs, according to unconfirmed reports.
The move would be significant because France is partly responsible for underwriting the eurozone bailout fund, which is at the heart of efforts to ease fears of a eurozone collapse.
Austria is also expected to be downgraded, which would leave just four of the 17 nations in the eurozone with the top-notch rating.
S&P, which announced in December that it had placed all the eurozone countries under review, is due to leave the AAA ratings of Germany, the Netherlands, Finland and Luxembourg untouched.
World markets fell amid the reports. The FTSE 100 Index in London was down more than 1% at one point, while Germany's Dax, France's Cac-40 and the US's Dow Jones Industrial Average were all in negative territory. The euro declined against most currencies, including the pound.
Reports of a breakdown in talks between Greece and its banks to restructure its debts fuelled fears of a default and also drove markets lower.
Credit ratings are a measure of how risky it is to lend to a country. A downgrade can force countries to pay higher interest rates, putting their finances under further strain.
Debt-ridden Spain and Italy are also in danger of suffering further downgrades, according to reports.
Losing its AAA rating would be an embarrassment for French President Nicolas Sarkozy, who is bidding for re-election later this year, and would hinder his efforts to steer the eurozone through the current crisis.
France's Bank chief Christian Noyer recently reacted to suggestions that the country could lose its AAA rating by saying that the UK should be downgraded before France.
He said: "They should start by downgrading the United Kingdom, which has higher deficits, as much debt, more inflation, and less growth than we do, and whose credit is collapsing."
But short-term predictions for the French economy are bleak. Its statistics agency Insee recently forecast that the economy would contract 0.2% in the fourth quarter and 0.1% in the first quarter of 2012 before returning to weak growth in the second quarter.
In August, S&P stripped America of its cherished Triple-A credit rating for the first time in its history because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilise the country's debt situation.
The UK has so far clung on to its top rating but a recent report by rating agency Moody's said the eurozone debt crisis had increased the risk of a downgrade.
Richard Driver, analyst for Caxton FX, said: "We all knew S&P was going to get its axe out but it has come a little sooner than expected.
"It sounds like Germany's AAA rating will be left alone, which is a relief, but this French downgrade is a major development if it's confirmed - Sarkozy will be furious.
"The big question is by how many notches France's rating is to be cut, one is manageable but two will really test the euro's resolve."
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