S&P in new threat to downgrade France

City A.M. Reporter
Standard & Poor's will likely lower the credit standing of five European nations, including top-rated France, by one or two notches if the region slips into recession and government borrowings increase, the rating agency said in a report.

The stress-test report assesses the capacity of the European Union and the IMF to support the euro zone under two possible scenarios a double-dip recession and a recession with high interest rates.

"Sovereign ratings on France, Spain, Italy, Ireland, and Portugal likely would be lowered by one or two notches under both scenarios," said S&P in the report dated 20 October.

A worst-case economic scenario would also likely prompt the recapitalisation of numerous banks in Spain, Italy, and Portugal, S&P said, adding that current support mechanisms may not be sufficient if conditions deteriorate beyond expectations.

"France would likely be downgraded to 'AA+' from 'AAA' because of a deteriorating fiscal position, even if the amount of stress applied remains modest," S&P analysts said.

It expects borrowing requirements to increase primarily because of increased budget deficits if economic conditions worsen.

"These stress scenarios are not our central expectation but a simulation of the possible outcomes if such hypothetical events were to occur," an S&P spokeswoman told Reuters.

European leaders will meet on Sunday in a summit to try to tackle the euro zone debt crisis that has already required financial rescues of Greece, Ireland and Portugal.

France and Germany, the most powerful euro zone countries, disagree over the best way to bolster the European Financial Stability Facility (EFSF), a 440 billion euro (£384bn) fund that so far has been used to bail out Portugal and Ireland. Paris fears it may lose its top credit rating if things go wrong.

Economists worry the slowdown in global growth may turn into a second recession at a time when governments have little room for bold policy responses.

"Looking ahead, we believe growth in the coming 18 months will be very weak, averaging between 1.0 percent and 1.5 pe rcent for the euro zone next year," S&P said under its base-case projections.