France may now be downgraded, says ratings agency

Nicolas Sarkozy's political triumph in Brussels may be fast overshadowed by growing economic grief, experts warned yesterday. The spectre of France losing its much cherished triple-A credit rating loomed larger as the dust settled on the Brussels summit.

The ratings agency Standard and Poor's (S&P) warned that France and other eurozone members faced possible downgrades. Money markets are also expected to pass an unsparing verdict on the deal this week when a number of eurozone governments have bond sales. Experts said Italy is expected to face punishing interest rates.

"I have no doubt that France's rating will be lowered," said Charles Wyplosz, professor of international economics at Geneva's Graduate Institute. "If I were Standard and Poor's, I would decide right away. In reality, France lost its triple-A a long time ago," he said. "There will be debt restructuring, which won't be voluntary. Banks will collapse, including possibly a number of French banks that are very exposed to Greece, Portugal, Italy and Spain."

A downgrade would reopen the question of the need for new austerity measures after two belt-tightening plans unveiled by the French government since the summer.

The money markets, which expressed cautious optimism after the Brussels deal, will be closely watching key European government bond sales this week, particularly those of Italian and Spanish government bonds. Short-term debt auctions on Monday and Tuesday by Italy, France and Spain will provide a first indication of true market sentiment before the more challenging bond sales. Analysts warned the price Rome will have to pay to ensure its bonds sell is likely to rise close to the unsustainable 7 per cent level.

"The market is hopeful the politicians are coming up with a solution which supports Italian bonds," said Michael Leister, of the German bank WestLB. "We are cautious because, after previous summits, we have seen relief and a risk-rally, but the mood has subsequently worsened. We have Spain and Italy coming up next week, so that will be carefully watched, and the bonds will react depending on how well they go," he said.

Governments in the eurozone have to repay more than €1.1trn (£939bn) of long- and short-term debt in 2012.

While share prices rose after the announcement, analysts expressed caution. "An all-mighty sell-off in the markets is brewing," said Nicholas Spiro of Spiro Sovereign Strategy. "EU leaders have patently failed to deal with the issue that investors care most about: shoring up eurozone sovereign debt."

His view was supported by Werner Faymann, the Austrian Chancellor, in a newspaper interview yesterday. Chancellor Faymann said: "A firewall was created, but it is not strong enough or large enough to have a big deterrent effect on speculators and financial markets in the coming years. The decisions taken lack the necessary firepower to have a sustained effect."