The French government confirmed yesterday that Standard & Poor's will lower France's AAA rating. Sarkozy is up for re-election and continues to stall measures that could likely begin with an intense privatization process. S&P has also downgraded ratings of several other European countries, including Spain. The market is already treating these nations as high risks and demanding higher rates for them.
The downgrade cuts deeply and will further impede the success of EU recovery funds, which do not have hard cash on hand, but are issuing new bonds with backing from EU member countries instead.
France is offering more than twenty percent of the guarantees itself, and with a lower credit rating its efforts to gather resources for bailed out countries are going to be more difficult. At the end of 2011, the EU recovery fund had already experienced problems attracting investors. Further, the banks that have debt from bailed out countries in their portfolios will start to lose present value and future financing.
All of this adds to the single greatest failure of a system designed to protect the euro: there is not enough cash in these instruments should Spain or Italy need it. The weakness of Europe's strategy is clear, and the strategy should be retooled, mostly because growth is faltering. The situation in Europe contrasts with the United States, who despite a lowered credit rating is still considered creditworthy. The way in which Germany is managing the crisis is losing direction. We need a change of course.