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| Financial ratings of european States by Fitch Ratings (Photo credit: Wikipedia) |
Fitch Ratings alone now rates France triple-A after Standard & Poor's Ratings Services downgraded the country in January, reflecting the degree to which the French economy is being dragged down by the three year-old sovereign debt crisis and losing competitiveness as others press ahead with budget cutbacks.
In a widely discussed lead article last week, the U.K. Economist magazine branded France "the time-bomb at the heart of Europe" because of President Francois Hollande's failure to adequately reform its bloated state sector, drawing a furious response from the French government.
Only five countries inside the 17-country euro zone are now rated triple-A by at least two of the three mains ratings firms. These are Austria, Finland, Germany, the Netherlands and Luxembourg.
France's downgrade will affect the ratings of the euro-zone's bailout facilities, since France is the second-largest contributor to the European Financial Stability Facility and its permanent replacement the European Stability Mechanism, Moody's lead analyst for France said Tuesday.
But debt and currency strategists are taking a more sanguine view as euro-zone finance ministers gather Tuesday to discuss Greece's bailout program.
The following are a selection of views from within the investment banking community:
CITIGROUP C +3.10% : Moody's ratings cut highlights France's economic weakness even though it remains to be seen whether it finally brings the so-called post-election honeymoon for the French government to an end, Citigroup says. "We think that the assessment of the rating agency could bring to the fore the French economic underperformance of late," Citi says. In this regard, potentially weak euro-zone purchasing managers' index data this Thursday could add to the idea that the economic headwinds for the euro are set to intensify in the coming months, it says.
SOCIETE GENERALE GLE.FR -0.56% : The downgrade is no big thing since it comes after widespread press discussion of France's loss of competitiveness relative to Germany. "It won't have a huge short-term market impact, given the talk that has gone before, and if the euro closes above $1.28 today I can see a spike towards $1.30," strategist Kit Juckes says. "But if the drivers of the euro's trend are relative interest rates and the credit concerns within Europe, the long-term drivers remain negative," Juckes adds.
MORGAN STANLEY MS +2.10% : Thinks French bonds don't face a selloff in the wake of the downgrade. A downgrade of France from AAA to AA by "any or all agencies" would have no effect on its eligibility for standard government bond indices, says Morgan Stanley. "A maximum of 18% of the market [representing some 217 billion euros of debt in nominal terms] might be influenced by a ratings downgrade: but the amount of index-driven selling would be near zero," it says.
Even so, forex strategists at the U.S. bank think the timing of the French rating cut ahead of the euro-zone finance ministers meeting has implications for the still-unfolding Greek debt saga. "The French downgrade will harden core [euro zone] resistance not to write down Greek debt as claimed by the [International Monetary Fund]," they say, since any write-downs of Greek debt could create budget gaps in other euro-zone countries and require additional fiscal cuts. "A third Greek aid package, allowing Greece to buy back its own bonds below face value, looks increasingly likely to us," Morgan Stanley says.
DEUTSCHE BANK DBK.XE -2.32% : The German bank puts a positive spin on the timing of French sovereign downgrade. Better now than later, it says, because if the downgrade had occurred when the EFSF/ESM was being used heavily, it may have moved markets more than it has currently. "Markets have also got over the shock of some of the major economies of the world losing their top [credit] rating, so this move probably won't have much short-term impact," Deutsche Bank says.
COMMERZBANK CBK.XE -1.30% : It says that credit ratings now play a limited role in the euro zone, not least because the ESM bailout scheme was deliberately designed in such a way as to ensure that the downgrading of an AAA country was no longer going to affect the credit volume (contrary to what would have happened with the EFSF). "So why should it matter that the share of the ESM bonds which are secured by France, are only rated AA+," Commerzbank muses.
The German bank's debt strategists also think that the French downgrade may throw up investment opportunities. That is because any post-Moody's selloff in French bonds would likely be limited and because other high-grade euro-zone member states like Germany now face a higher a risk of a downgrade too. As a result, any widening in the gap--or spread--in yields between French bonds and bonds issued by other core euro-zone member states will be limited. "The Moody's downgrade of France poses risks for a setback after French paper had gained traction recently. However, we believe a re-widening of spreads will be bought, similar to the S&P downgrade (of France) in January," the German bank says. In addition, "the risk of negative rating actions on other core countries during coming quarters remains high," it says.
RBC CAPITAL MARKETS: In keeping with Commerzbank's broadly benign thinking, it doesn't expect the French downgrade to have much of an impact on bond markets. "...[We] do expect some marginal negative impact to be felt initially...[But] the market already encompasses a wider spread for French paper, already limiting the downgrade impact," RBC says. The Canadian bank says investors will not be surprised by the Moody's action and thus should not be forced into action. "Besides, the French market remains supported by large domestic buyers--most of whom shall be less sensitive to ratings anyhow," it says.
UBS UBSN.VX -1.45% : It stresses that France's credit rating is still very strong, even if it's now rated one notch down from the exclusive triple-A club. UBS says forced selling of French sovereign bonds seems unlikely. "Also, when S&P first stripped France of its AAA rating in January, the French sovereign bond market hardly reacted--although granted that earlier downgrade was well signaled in advance [unlike this one]," UBS adds.
CREDIT AGRICOLE ACA.FR -0.77% : Expects recent strong buying of French debt to continue for the time being, on the working assumption that it's not ratings sensitive and more a function of the fact that the French bond market is liquid, has a high correlation to German Bunds and offers a big pickup in yields over that offered on German debt, says Peter Chatwell, senior interest rate strategist.
MIZUHO: The Japanese bank says it should not be assumed that French bank downgrades will now automatically follow, seeing as BNP Paribas, BNP.FR -0.61%Societe Generale and Credit Agricole are already rated well below the French sovereign, at A2. Credit analyst Roger Francis notes that Moody's has previously indicated that a marked deterioration in the ability of the French government to support its banks could result in downgrades but says "there is a reasonable chance of avoiding cuts." ...
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