US agency drops bombshell on EU anti-crisis plan

It noted that: "a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues."

It added "there is a risk [of] reform fatigue" in the worst-hit countries, creating "lower levels of predictability" on the political front.

The agency also downgraded Austria, Cyprus, Italy, Malta, Portugal, Slovakia, Slovenia and Spain, scalping another triple-A country (Austria) and moving Cyprus and Portugal into junk territory.

On the positive side, it kept Germany's triple-A status and praised the European Central Bank, saying it "has engaged in unprecedented repurchase operations for financial institutions, greatly relieving the near-term funding pressures for banks."

The blow comes two weeks before 26 EU countries aim to agree the new treaty at a summit in Brussels. It also comes 100-or-so days before French leader Nicolas Sarkozy tries to get re-elected.

Sarkozy's finance minister, Francois Baroin played down the development. He said on national TV it is "not a catastrophe ... ratings agencies don't determine French politics." The president's opponents laid into him, however. Socialist candidate Francois Hollande said the downgrade proves Sarkozy's whole economic policy is wrong. The chairman of the Socialist party, Martine Aubry said Sarkozy is "solely responsible."

EU authorities said S&P made a mistake.

Economic affairs commissioner Olli Rehn said in a statement: "I regret the inconsistent decision ... at a time when the euro area is taking decisive action on all fronts of its crisis response."

Jean-Claude Juncker - the head of the euro-using countries' club, the eurogroup and the leader of Luxembourg - said he is "determined" to protect the triple-A rating of the EU's bail-out fund, the EFSF. By downgrading France, a big EFSF contributor, S&P risks increasing the fund's borrowing costs, creating a vicious circle.

In more bad news, Greece on Friday said talks with private bond-holders represented by the Washington-based Institute of International Finance have broken down.

If Athens cannot persuade investors to write off at least 50 percent of their debt by 20 March - the deadline for its next major repayment - it risks going bust and leaving the euro, in a setback of historic proportions for the EU project.

"We are fully aware of how critical the situation is. Until these negotiations are completed, we face dire economic dangers," Greek Prime Minister Lucas Papademos said in a speech also on Friday.