Photo: The Canadian Press. All rights reserved.

French finance minister Francois Baroin leaves the Elysee Palace Friday Jan. 13, 2012, following a meeting with French President Nicolas Sarkozy, in connection with the downgrading of France's credit rating by Standard & Poor's. (AP Photo/Remy de la Mauviniere)

Standard & Poor's swept the debt-ridden European continent with punishing credit downgrades Friday, stripping France of its coveted AAA status and dropping Italy even lower. Germany retained its top-notch rating, but Portugal's debt was consigned to junk.

In all, S&P, which took away the United States' AAA rating last summer, lowered the ratings of nine countries, complicating Europe's efforts to find a way out of a debt crisis that still threatens to cause worldwide economic harm.

Austria also lost its AAA status, Italy and Spain fell by two notches, and S&P also cut ratings on Malta, Cyprus, Slovakia and Slovenia.

The downgrades on more half of the countries that use the euro could drive up yields on European government debt as investors demand more compensation for holding bonds deemed to be riskier.

Higher borrowing costs would put more financial pressure on countries already contending with heavy debt burdens.

"In our view, the policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone," S&P said in a statement.

Stocks fell Friday as downgrade rumours reached the trading floors of Europe and the United States. But the declines were nothing like the wrenching swings of last summer and fall, when the debt crisis threw the markets into turmoil.

The Dow Jones industrial average in New York was down 0.5 per cent. Stocks fell 0.6 per cent in Germany, 0.5 per cent in Britain and 0.1 in France, but each of those markets closed before French Finance Minister Francois Baroin gave first word of the country's downgrade on French television.

Earlier Friday, the euro hit its lowest level in more than a year and borrowing costs for European nations rose.

Some analysts downplayed the impact of the downgrades.

"It's going to create bad headlines for a day or two," said Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics. But "there's no underlying new information ... This will be quickly forgotten."

Still, the cut in the French credit rating may lead bond traders to raise borrowing costs for the financial rescue fund, said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, a financial firm.

"There's a legitimate reason to be concerned," he said. "A weaker France means a weaker bailout fund."

France's downgrade to AA+ lowers it to the level of U.S. long-term debt, which S&P downgraded last summer. S&P had warned 15 European nations in December that they were at risk for a downgrade.

France is the second-largest contributor behind Germany to Europe's financial rescue fund. The fund still has a rating of AAA. That means that it can borrow on the bond market at low rates.

Borrowing costs for the French government rose before the announcement. The yield on France's 10-year government bond rose to 3.1 per cent from 3 per cent earlier. That is still less than the 3.36 per cent rate on the same bond last week and far below the 6.6 per cent that Italy has to pay to borrow money from bond investors for 10 years.

Germany, the strongest economy in Europe, pays a yield of just 1.76 per cent. The United States 10-year Treasury note paid 1.85 per cent Friday, down 0.08 percentage points, a sign that investors were seeking safety in U.S. debt.

Speaking on France-2 Television, Baroin said the downgrade of France's AAA sovereign debt rating was not "a catastrophe." He underscored that France still had a solid rating.

"The United States, the world's largest economy, was downgraded over the summer," Baroin said. "You have to be relative, you have keep your cool. It's necessary not to frighten the French people about it."

Some affected countries took issue with S&P's conclusions. Portugal's Finance Ministry said there were "significant methodological shortcomings" in the agency's appraisal because it overlooked the bailed-out country's debt-reduction and economic reform efforts.

European Commission Vice-President Olli Rehn called S&P's actions "inconsistent." He said countries affected by the euro crisis have taken "decisive action in all fronts of its crisis response" to push reforms and strengthen banks.

Fears of a downgrade brought a sour end to a mildly encouraging week for Europe's heavily indebted nations and were a stark reminder that the 17-country eurozone's debt crisis is far from over.

___

Contributing to this report were Associated Press writer Nicole Winfield in Rome, Associated Press writer Gabriele Steinhauser in Brussels and AP Business writers David McHugh in Frankfurt, Paul Wiseman in Washington and Matthew Craft in New York.