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In France, the Pain of Rating Downgrade Is Especially Acute

An S.& P. downgrade provides no truly new information about the euro zone’s debt struggle, now entering its third year. But the move at least symbolically places the crisis squarely on the doorstep of the Continent’s second-biggest economy after Germany — which retains the AAA credit rating of which France can no longer boast.

Keeping that top credit rating had long been a badge of honor for France — and a political point of pride for President Nicolas Sarkozy, who now enters a difficult re-election campaign with a stigma that his opponents quickly moved to exploit.

News of the downgrade blared from French airwaves and on Web sites, as the finance minister, François Baroin, declared that the event was “not a catastrophe.” Members of the opposing Socialist party wasted no time painting a gloomier picture. “He’s the president of the degradation of France,” Martine Aubry, the party’s secretary, said of the French president.

Mr. Sarkozy had often boasted of France’s gilt-edged standing, and the looming prospect of its loss had recently become a prime topic of political discussion, a hot issue on talk shows and fodder for comedians and political cartoonists.

But whether the S.& P. downgrade will have a marked effect on France’s cost of borrowing money is something only the coming months and weeks will tell.

Because the demotion had been widely anticipated, French officials have said the impact will be manageable. French debt, and that of most other euro zone governments, was already trading as if a downgrade had happened. Yields on French 10-year government bonds, which rose slightly Friday and stood at 3 percent, have been trading more than a percentage point above Germany’s, the European benchmark. Germany’s interest rate fell slightly to 1.8 percent Friday.

“It isn’t the end of the world” for France, said Jacob Funk Kirkegaard, an economist at the Peterson Institute for International Economics in Washington. “There will be a lot of terrible headlines,” he said in an interview before the official announcement of an S.& P. downgrade, “but it’s not going to cause French bonds to decline a lot on a persistent basis.”

S.& P. kept a negative outlook for France, citing its high government debt, and a rigid labor market that has helped keep the unemployment rate high, at around 9 percent. The agency said it could downgrade France yet again this year or next if efforts at budget consolidation strategy and structural reforms faltered.

The downgrade will raise the nation’s borrowing costs at a time when it is trying to reduce around 1.7 trillion euros of debt.

In Paris, for example, a sparkling light show that illuminated the Eiffel Tower for 10 minutes every hour after dark has been cut to 5 minutes. Cities and municipalities will feel a similar pinch. Some have already begun adjusting to tighter financial constraints.

France is one of the major financial backers of the European rescue fund, the European Financial Stability Facility, which is meant to prevent the credit contagion that began in Greece from spreading to large countries like Italy and Spain.

The price of its rescue fund, whose borrowing costs depend in part on the credit ratings of its contributing nations, will now probably rise because of the downgrades to France and others. Higher costs could make the fund less effective in stemming the euro crisis.

Many French leaders have noted that S.& P.’s downgrade of the United States’ AAA credit rating in August did not stop investors from flocking to Treasury securities. To a large extent, though, the United States has a special safe-haven status, as the world’s largest economy and as a financial power outside the euro zone, which France does not.

At the time S.& P. issued the American downgrade last summer, it had warned that France — of all the major economies that still held the highest credit grade — was the most vulnerable because its finances were being eroded by the European crisis. That warning came as the stocks of two of the country’s biggest banks — Société Générale and BNP Paribas — were being hammered by investors amid rising concern that they had been weakened by the crisis. The shares of both banks have continued to decline since then.

Tags: Acute, Downgrade, Especially, France, Rating

The Week’s Business News in Pictures

A demonstration on Friday outside the offices of Standard & Poor’s in Paris. Standard & Poor’s  stripped France of its sterling credit rating, cut Portugal’s credit to junk status and downgraded Italy’s debt by two steps in a wide-ranging revision of European countries caught in the euro crisis.

Tags: Business, Pictures, Weeks

DealBook: Weak Quarter Weighs on JPMorgan’s 2011 Profit

Justin Sullivan/Getty ImagesJPMorgan Chase’s credit card business and commercial lending operation showed signs of improving.

JPMorgan Chase kicked off bank earnings season on Friday with news that its quarterly profit dropped 23 percent last year, results that weighed on the full-year profit.

The bank turned a $19 billion profit in 2011, up 9 percent from $17.4 billion a year earlier, as its credit card business and commercial lending operation showed signs of improving. The results amounted to $4.48 a share, up from $3.96 a share last year.

But the profit engine stalled in the fourth quarter, when JPMorgan earned $3.7 billion, or 90 cents a share, down 23 percent from the same quarter a year earlier. The results matched analysts’ estimates for the period.

The fourth-quarter slump was owed in part to declining revenue and a slowdown in JPMorgan’s sprawling investment bank, which suffered from the sluggish economic recovery in the United States and concerns that the European debt crisis would sweep across the Continent.

The investment bank booked a $567 million accounting loss in the fourth quarter tied to the perceived riskiness of its own debt, reversing a one-time gain from the previous quarter that propped up earnings across Wall Street. In all, the unit’s profit sank 52 percent to $726 million in the fourth quarter.

Shares of JPMorgan were down more than 3 percent, to about $35.55, in morning trading.

Despite the turmoil in the fourth quarter, Jamie Dimon, JPMorgan’s chairman and chief executive, highlighted the firm’s gradual progress since the financial crisis. He also sounded a note of cautious optimism about the broader economic recovery.

“We have a mild recovery that might actually be strengthening,” Mr. Dimon said in a conference call with reporters, adding that the comeback appears to be “broad.”

The bank’s earnings report comes a day after Mr. Dimon announced the second major shuffling of his management team in a year. Among the changes, Jay Mandelbaum, head of strategy and business development, will leave the bank. And Barry Zubrow, JPMorgan’s risk management chief who guided the bank through the financial crisis, will now head corporate regulatory affairs.

With the steady growth in profit last year, JPMorgan has emerged from the crisis as one of Wall Street’s most dominant firms. In 2011, JPMorgan stripped Bank of America of its title as the nation’s biggest bank by assets. Bank of America is still struggling to shed the legacy of the subprime mortgage mess.

“JPMorgan is in the best position for no other reason than they don’t have the troubles that Bank of America has,” said Jim Sinegal, an analyst with the research firm Morningstar.

While JPMorgan had some recent bright spots in its core businesses, the gains were padded by the bank’s decision to set aside $730 million in fewer reserves for loan losses. Additions to the reserve are an expense.

Much of the change came from reserves held for the bank’s credit card portfolio, which has steadily improved. The move also benefited Chase Retail Financial Services, the bank’s consumer banking arm that offers everything from mortgages to checking accounts. The unit earned $533 million in the fourth quarter, up from $459 million a year earlier.

Commercial lending was a particular strong point for the bank. The unit’s profit rose to a record $643 million, a 21 percent increase from the prior year, as lending to corporations grew for the sixth consecutive quarter.

“I believe that you are seeing real loan growth,” Mr. Dimon said on the conference call. “And I think that will continue.”

But his bank’s earnings improvement last year was overshadowed by the fourth-quarter woes and a drop in revenue. Revenue fell to $99.8 billion, down from $104.8 billion last year, as new federal rules reined in fees tied to overdrafts and debit cards. The $567 million accounting loss also weighed down revenue.

The revenue struggles are not unique to JPMorgan, a diversified bank seen as a gauge for the performance of Wall Street. When the nation’s other big banks — Goldman Sachs, Morgan Stanley, Citigroup and Bank of America — report earnings next week, most are expected to detail similar slowdowns in revenue.

“It’s hard to think of a bright spot on the revenue side,” Mr. Sinegal said. “That issue is going to linger.”

Tags: DealBook, JPMorgans, Profit, Quarter, Weighs