French rating focus shifts to degree of cut

Updated: 2012-01-13 07:46

(China Daily)

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PARIS - 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 indifference - 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 eurozone 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.

That would endanger efforts to put an end to the 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 on Wednesday, 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 United Kingdom and more than the cost of insuring debt issued by Indonesia or the Philippines against a default, Credit Market Analysis Ltd prices showed on Wednesday.

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

On Wednesday, 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".

Moody's said on Dec 12 that 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 on Dec 5 placed the ratings of 15 euro nations, including Germany, on review for possible downgrades.

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