Bloomberg News

French AAA Ratings Focus Shifts to Size of Cut: Euro Credit

January 12, 2012

(See EXT4 for more on the sovereign debt crisis.)

Jan. 12 (Bloomberg) -- After weeks of handwringing about a possible loss of France’s top credit rating, President Nicolas Sarkozy now gives a Gallic shrug.

Investors are interpreting the insouciance -- with Sarkozy saying that losing the AAA rating isn’t “insurmountable” -- to mean that France has accepted the inevitable. The question now is whether Standard & Poor’s will follow through with a threat of a two-level cut.

Sarkozy’s shift, intended to ready voters for the blow ahead of April’s presidential elections, contributed to the increase in the premium France pays over Germany to borrow for 10 years. Since Dec. 5, when S&P said that it may downgrade 15 euro nations amid a deepening regional debt crisis, the spread has widened by more than 40 percent to 133 basis points.

“They’re preparing the ground for something they see as inevitable,” said Nicola Marinelli, who manages $150 million at Glendevon King Asset Management in London. “The market is expecting France to be a strong AA; expecting it to be AA+. If any rating change goes lower than that the spread with Germany can widen further.”

France, Europe’s second-largest economy and the No. 2 backer of the region’s rescue fund after Germany, was singled out among the six euro-region holders of the top AAA rating by S&P as the one that risked a two-level lowering of its credit rating. The country’s downgrade would affect the rating of the European Financial Stability Fund, making the bailout of the region’s troubled economies more expensive.

‘Priced In’

That would endanger efforts to put an end to the more-than- two-year-old sovereign debt crisis as Europe slides into recession, economists said.

“The one-notch downgrade, our base scenario, is more or less priced in,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “The wider consequences are not necessarily priced in. It will weaken confidence and could fuel the European debt crisis in a self-fulfilling spiral.”

French 10-year bonds yielded 3.14 percent yesterday, about 133 basis points more than similar German securities. The spread was less than 50 points a year ago. The extra yield investors demand to hold French bonds instead of benchmark German bunds rose to as much as 204 basis points on Nov. 17, the most since 1990, as concern deepened the region’s debt crisis was spreading.

It costs 219 basis points to insure French debt for five years, more than twice as much as AAA rated U.K. and more than the cost of insuring debt issued by Indonesia or the Philippines against a default, CMA prices showed yesterday.

Election Fever

Sarkozy, who has sought to protect his government’s creditworthiness by announcing tax increases and spending cuts, has attempted to position himself for a 2012 re-election campaign as the most credible candidate on economic matters.

After earlier painting the loss of the AAA rating as a catastrophe, he and his ministers have said they’re going to focus on growth and competitiveness rather than worry about what ratings companies might do.

Yesterday, Sarkozy said France needs to focus less on markets and ratings companies.

“Markets and ratings agencies exasperate our citizens,” he said at a reception for lawmakers in Paris. “We must take back control of our destiny.”

Budget Minister Valerie Pecresse said in an interview last week that the government “isn’t working for the rating agencies.”

‘Heightened Risk’

Sarkozy trails his main rival, Socialist Party candidate Francois Hollande, by about 14 points in voting intention for the second round of the election, according to a BVA poll for Le Parisien newspaper published Jan. 9.

Moody’s said Dec. 12 it will review the ratings of all EU countries after a summit on Dec. 9 in Brussels failed to produce “decisive policy measures” to end the region’s debt turmoil. S&P placed the ratings of 15 euro nations, including Germany, on review for possible downgrades on Dec. 5.

Fitch Ratings cut France’s credit outlook on Dec. 16 on the “heightened risk of contingent liabilities” from the euro-region crisis. 17. This week Fitch said it probably won’t downgrade France in 2012 unless the regional debt crisis intensifies.

Since the ratings companies’ announcements, markets have been roiled by frequent speculation about a French downgrade. Finance Minister Francois Baroin yesterday denied having been notified about a downgrade, calling it “false.”


France’s woes, like those of other euro-area countries, are compounded by an economy that’s edging toward recession as budget cuts to contain the fiscal crisis bite.

The French economy is probably already in a recession that will last through March, national statistics office Insee said last month. France has the biggest debt burden of the six top- rated euro nations, at 85 percent of gross domestic product.

A ratings cut would be “another headwind for Sarkozy’s reelection,” Standard Chartered’s Costerg said. “He first tried to raised the stakes to defend AAA and now is trying to downplay it. Why? It’s the election.”

--With assistance from Helene Fouquet and Olivia Sterns in Paris. Editors: Vidya Root, Mark Gilbert

To contact the reporters on this story: Mark Deen in Paris at;

To contact the editors responsible for this story: Vidya Root at

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