France has lost its top AAA credit rating from Standard & Poor's and eight other eurozone governments have also been downgraded by the ratings agency.
Italy, Spain, Cyprus and Portugal were cut two notches, with the latter two given "junk" ratings. Germany kept its AAA rating, and with a stable outlook.S&P blamed the failure of eurozone leaders to deal with the crisis, or even diagnose its causes correctly.
Rumours of S&P's move prompted stock markets to fall earlier in the day.
Misdiagnosis Austria, like France has lost its top AAA rating, and been downgraded to AA+. Its economy exports a lot to recession-struck Italy, while its banks are facing losses on subsidiaries they own in financially troubled Hungary.
S&P's rating of Italy - currently at the epicentre of the crisis - has been cut two notches from A to BBB+.
Spain was also cut two notches from AA- to A, as was Portugal, whose rating fell from BBB- to a "junk" rating of BB - indicating a very high level of risk for lenders.
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The downgrades increase the dependence of the big banks on finance from the ECB - and for the economic recovery of the eurozone, that's a very bad thing”
Apart from Germany and lower-rated Slovakia, all the other countries being reveiwed were given a "negative outlook", meaning there is a 30% chance of a further downgrade.
"Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone," said S&P in its statement.The agency said the plan currently being discussed by eurozone leaders - to limit governments' future borrowing - was based on a misdiagnosis of the cause of the financial crisis.
It said the crisis was more to do with trade deficits and a loss of competitiveness by "periphery" eurozone economies such as Italy and Spain, than excess borrowing by governments.
The agency also praised the ECB for taking action to stop a total collapse in market confidence in the eurozone late last year.
'No catastrophe' French Finance Minister Francois Baroin confirmed the news about his own country ahead of S&P's announcement on Friday night.
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The French downgrade is terrible news for President Sarkozy, who has only 100 days before the elections to claw back his yawning poll deficit behind the Socialist Francois Hollande.
It may be that in the short term the economic effects of the downgrade are quite limited. The markets have long assumed this was coming, so may already have absorbed the impact on France's cost of borrowing.
But the political fall-out could be very disagreeable for the president.
His pitch ahead of the elections has been to tell the voters that - though he acknowledges they may not warm to him personally - he has what it takes to battle through the crisis.
France is in the midst of an economic storm, he is saying, so best to entrust the ship of state to a proven captain.
But this argument looks a little thin when the country has just lost its gold star status, and under his watch. And he can't say it doesn't matter that much - because for most of last year he was telling the French that safeguarding the triple-A was an absolute necessity.
To be fair, the French are not especially impressed either by the prospect of a President Hollande. But that is meagre comfort for Sarkozy.
It's the first rule of politics: if you're in charge, you take the rap.
Analysis
It may be that in the short term the economic effects of the downgrade are quite limited. The markets have long assumed this was coming, so may already have absorbed the impact on France's cost of borrowing.
But the political fall-out could be very disagreeable for the president.
His pitch ahead of the elections has been to tell the voters that - though he acknowledges they may not warm to him personally - he has what it takes to battle through the crisis.
France is in the midst of an economic storm, he is saying, so best to entrust the ship of state to a proven captain.
But this argument looks a little thin when the country has just lost its gold star status, and under his watch. And he can't say it doesn't matter that much - because for most of last year he was telling the French that safeguarding the triple-A was an absolute necessity.
To be fair, the French are not especially impressed either by the prospect of a President Hollande. But that is meagre comfort for Sarkozy.
It's the first rule of politics: if you're in charge, you take the rap.
"It's not good news, but it's not a catastrophe," Mr Baroin said following emergency talks called by President Nicolas Sarkozy with the prime minister and other key ministers.
He said the French government was not planning any additional spending cuts or tax rises as a result of the downgrade: "It's not ratings agencies that decide French policy."Meanwhile, European economic affairs commissioner, Olli Rehn, said that he regretted "the inconsistent decision [by S&P]... at a time when the euro area is taking decisive action in all fronts of its crisis response."
France is being downgraded just one notch by S&P, to AA+.
The country still has a top AAA rating from the other two main ratings agencies, Moody's and Fitch.
Spooked Earlier, the euro hit a new 16-month low against the dollar of $1.263 on rumours of the multiple downgrades, before rebounding.
It also dropped against the pound, hovering at about 82.9 pence.
Markets were also spooked by news that talks between Greece and its private sector lenders over a restructuring of its debts - including a 50% forgiveness - had broken down.
An agreement is a precondition for Greece receiving its next round of bailout money from the European Union and International Monetary Fund, without which it faces the risk of running out of money to repay its debts, and a possible exit from the eurozone, in the coming months.
London's FTSE 100 ended the day down 0.5% and Frankfurt's Dax 0.6%, while the Dow Jones in New York fell 0.4%, although it was widely expected that the ratings cuts were coming.
Borrowing cost Credit ratings are used by banks and investors to decide how much money to lend to particular borrowers.
The cut in the so-called sovereign ratings of governments is likely to lead to most other borrowers domiciled in the same countries - including banks and companies - being downgraded.
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Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
Credit rating
The assessment given to debts and borrowers by a ratings agency according to their safety from an investment standpoint - based on their creditworthiness, or the ability of the company or government that is borrowing to repay. Ratings range from AAA, the safest, down to D, a company that has already defaulted. Ratings of BBB- or higher are considered "investment grade". Below that level, they are considered "speculative grade" or more colloquially as junk.
Although the move has been widely expected, it is still likely to make it somewhat more difficult and expensive for borrowers from those countries to raise money, including for the governments themselves.
Italy's 10-year implied cost of borrowing in bond markets jumped by a third of a percentage point after the rumours emerged, but ended the day largely unchanged at just over 6.6%.France's borrowing cost rose slightly, from 3.03% to 3.07%. Germany - considered the safest borrower in the eurozone - saw its borrowing cost fall from 1.83% to 1.76%.
The downgrades may also have an impact on the eurozone's rescue fund.
The European Financial Stability Facility (EFSF) - which has already been used to rescue Portugal and the Irish Republic - is guaranteed by the eurozone governments.
The fund is supposed to contribute towards future bailouts of Greece.
It was already having trouble borrowing money needed to provide its rescue loans. S&P's announcement may make that task even harder.
| Country | Old Rating | New Rating | Cut |
|---|---|---|---|
| Austria | AAA | AA+ | One notch, loses top rating |
| Belgium | AA | AA | None |
| Cyprus | BBB | BB+ | Two notches to junk |
| Estonia | AA- | AA- | None |
| Finland | AAA | AAA | None |
| France | AAA | AA+ | One notch, loses top rating |
| Germany | AAA | AAA | None |
| Ireland | BBB+ | BBB+ | None |
| Italy | A | BBB+ | Two notches |
| Luxembourg | AAA | AAA | None |
| Malta | A | A- | One notch |
| Netherlands | AAA | AAA | None |
| Portugal | BBB- | BB | Two notches to junk |
| Slovakia | A+ | A | One notch |
| Slovenia | AA- | A+ | One notch |
| Spain | AA- | A | Two notches |
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