French regulators have been asked to investigate how an error at Standard & Poor's led to the rating agency reporting a downgrade of the country's debt. S&P sent a message on Thursday afternoon to some of its subscribers saying that France had lost its top AAA-rating on a day when markets were already being shaken by concerns over the European and global economy.
The rating agency has stressed that France, which recently announced a further round of austerity measures, retains its top rating and has a stable outlook. The cause was a "technical error", S&P said in a statement, and did not mean that the agency was gearing up for a downgrade in the near future.
The error, along with further bad news out of the European Commission - which lowered its forecasts for growth within the single currency area - and the ongoing concern over whether Italy's debt problems would spin out of control led to the yields on French 10-year debt rise to nearly 3.5%. After S&P's statement there was a modest market rally.
"The good news is that the denial led to an affirmation of the ratings that helped fuel the risk rally for the rest of the day," Deutsche Bank strategist Jim Reid wrote on Friday morning.
A downgrade of one of the core AAA-rated European economies could potentially have undermined the eurozone's crisis response funds. The European Financial Stability Facility (EFSF), a bailout fund which, once constructed, is expected to be used to recapitalise banks and buy up debt, issues bonds backed by those countries. If France lost its top rating, the EFSF would also probably lose its top rating too.
Europe's bailout mechanisms are under close watch as the crisis in Italy continues. Much of this week's market chaos has been fuelled by he lack of a credible safety net to rescue the Italian economy as its cost of borrowing reaches unsustainable levels and its political turmoil persists. The size of any bailout there would be far greater than in Greece, Ireland or Portugal, and investors fear that the current mechanisms would be unable to accommodate that level of assistance. A downgrade of the EFSF could be seriously damaging.
The French economy has come under increasing scrutiny as the eurozone crisis has rumbled on. The country's banking sector is exposed to sovereign debt in Italy and the peripheral countries, and in the event of a default would probably need significant recapitalisation from the state. Moody's, another rating agency, warned last month that the country's economy was weakening and that it may review its AAA rating.