French president Nicolas Sarkozy
French President Nicolas Sarkozy. Reuters

Financial rating agency Standard & Poor's has downgraded the French credit rating in an announcement that has sent shockwaves through the eurozone and global markets.

France, along with the other eurozone countries, was put on to "negative credit watch" towards the end of 2011 but the official report of the downgrade from AAA to AA has put huge pressure on President Nicolas Sarkozy just months ahead of the general election.

The downgrade will mean France's sovereign bond yield will increase, making it essentially more expensive for Paris to borrow money. That will ultimately weaken the French economy.

Sarkozy, who has been leading attempts to fix the eurozone crisis along with his German counterpart, Angela Merkel, will now have to scale down his "euro leader" status to focus on his own back garden as a result.

The eurozone bailout fund, the European Financial Stability Facility (EFSF), is under threat with France's ability to contribute severely weakened. The EFSF in turn faces downgrading by S&P after the markets close on Monday leaving the ball in Germany's court should it wish to contribute even more to the bailout fund.

With Greece talks breaking down today between the government and bond holders, there is no clear lending facility for a bailout when the bond matures in two months.

The news saw the FTSE-100 index surrender its earlier gains to fall 36 points to 5626, while the Dow Jones Industrial Average in the US opened 0.8% lower. Germany's Dax and France's Cac-40 were also in negative territory. European markets tumbled in the last hour of trading and American markets, including Nasdaq, slumped.

Other eurozone countries were also downgraded but Germany survived and kept its AAA rating.

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