The European situation continues to worsen as embattled French President Nicolas Sarkozy begins to soften the voters up to expect the loss of France’s AAA credit rating. From Reuters:
In an interview, Sarkozy told Le Monde newspaper the loss of the AAA status — a grade that allows France to finance its debt as cheaply as possible — could be overcome and that he would respond “with a cool head” if it happened.
Ratings agency Standard & Poor’s has put France under review for possible downgrade along with 14 other euro zone countries and Moody’s is also reappraising France’s rating as a result of the debt market crisis in Europe, also raising the specter of a downgrade.
“It would be one more difficulty, but not insurmountable,” Sarkozy said.
The assumption is that Sarkozy wouldn’t be telling voters not to worry about the consequences of a downgrade if he didn’t believe a downgrade was in the works.
The ratings downgrade, if it happens, won’t just be bad news for France. It effectively torpedoes the much ballyhooed European Financial Stability Fund, hailed for months in Brussels as the wonder-working, expandable cure-all that would solve the eurozone’s problems. If France doesn’t have a triple A rating, the EFSF can’t have one either, and one credit risk can’t go surety for the debts of another.
Meanwhile, Sarkozy trails badly in the polls and his likely successor François Hollande is telling all and sundry that the deal Sarkozy made last week in Brussels stinks and that if he, Hollande, is elected, he will rip it up and get a better one. That may just be empty rhetoric as Angela Merkel is a tough lady to move, and she’s the one with the money. Still, it’s one more sign that the European political process is getting less coherent not more so as the continent approaches the next stage of the crisis.