–Adds Background To Story Transmitted At 15:51 GMT

PARIS (MNI) – Standard & Poor’s plans to cut France’s AAA credit
rating in a wave of downgrades that it is expected to announce later on
Friday, the French TV channel LCI reported.

LCI television, quoting European sources, said that France will be
downgraded along with Slovakia, while ratings for Germany, Belgium, the
Netherlands and Luxembourg will be reaffirmed.

Other media reports said that Austria would also lose its AAA
rating.

Some sources said the announcement could come late Friday after the
Wall Street close.

Efforts to reach S&P for comment were not successful. The agency
said last month that it was putting most Eurozone nations on review
because of the debt crisis and the worsening economic outlook. It said
France’s rating could be lowered by one or two notches.

Moritz Kraemer, director of European sovereign ratings at S&P, said
December 6 that the agency had put 15 Eurozone countries on its watch
list for a possible downgrade because efforts to solve the debt crisis
by EU leaders had been “largely defensive and piecemeal.”

Kraemer said the results of the credit review would depend
critically on whether decisions taken at the December EU summit were
“convincing enough to bring back confidence in the market,” he said.

At the time, Bank of France Governor Christian Noyer had argued
that a downgrade of France “was not justified on the economic
fundamentals,” saying Britain should be first on the list, given its
deficit and debt levels.

In an interview published Friday, the head of the French bank
Societe Generale, Frederic Oudea, said such a downgrade was already in
the markets but could still have an impact on the banking sector.
“Structurally, one must get used to lower ratings, since the reasoning
of agencies has changed.”

French debt has long lost its preferential standing in financial
markets, and the country’s borrowing costs compared to Germany have
risen as investors have turned to Bunds as a safe haven. Yields on
French 10-year debt are now trading around 3.08% compared to 1.77% for
German 10-year paper. The spread has widened by around 10 basis points
compared to Thursday’s levels.

S&P has evidently not been impressed that the central government
undershot its deficit target last year and is thus likely to be able to
post a public deficit of less than 5.7% of GDP.

Attention is more probably focused on the impact of a recession and
anemic growth of government revenues this year, as well as the uncertain
outcome of this year’s presidential elections, which could bring the
Socialist Party to power with support of smaller leftist parties which
do not share the current government’s commitment to lowering the public
deficit to under 3% by 2013 and eliminating it completely by 2016.

Although market confidence has recovered in recent weeks, it has
been largely because of the nearly half-trillion euros that the European
Central Bank has pumped into the banking system through its three-year
refinancing operation. The EU summit agreement in December on a fiscal
compact was greeted skeptically by investors because it lacked detail
and required a substantial amount of time to implement.

–Paris newsroom, +3314271-5540; jduffy@marketnews.com

[TOPICS: M$F$$$,M$X$$$,MT$$$$,MGX$$$]