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How S&P’s downgrade will impact France


Latest update : 2012-01-13

France's ratings downgrade by Standard and Poor's Friday will have a series of impacts on the eurozone’s second-largest economy, including raising the cost of borrowing for the state and ultimately for average households in France.

AFP - The looming debt rating downgrade of France and Austria by Standard and Poor's on Friday will not only push up their borrowing costs, it also threatens to hurt their economies, analysts said.

One immediate consequence of the ratings downgrade will be that the governments concerned have to pay more to borrow money from the markets.

In the case of France, that will lead to an almost immediate jump in rates for 10-year bonds which could rise from around 3.0 percent "to 4.0 percent in the case of a downgrade by one notch and to 5.0 percent with a two-notch downgrade," said Nicolas Bouzou of the Asteres economic analysis company.

EU government officials said Friday S&P had decided to drop France's rating by one notch from the top AAA rating to AA+.

Higher interest rates drive up the cost of debt, adding to the debt burden itself and reducing governments' room for manoeuvre.

"That could generate self-fulfilling phenomena as in the case of Italy," which was forced to push through austerity plans in the wake of the downgrade of its debt by both S&P and Moody's in the autumn, Bouzou said.

Banks could be hit in a knock-on effect because of their use of sovereign debt as guarantees to borrow funds from the markets.

And that, in turn, could harm the real economy, because banks will try to pass on the higher costs via higher interest rates to businesses and households, or even cut back on lending, said Barclays Capital economist Thorsten Polleit.

The debt downgrade could throw a further spanner in the works of efforts to resolve the debt crisis, because the triple-AAA rating of eurozone's EFSF bailout fund depends on top-notch ratings of the member states that finance it.

For this very reason, Standard & Poor's has also threatened to downgrade EFSF's own ratings, leading governments to turn for help to the International Monetary Fund (IMF) to reinforce a eurozone financial firewall.

Some economists, however, believe that the downgrade was already priced in by the markets and will not have such catastrophic effects.

"There's no reason why the formal official downgrade will make a greater impact than the threat of the downgrade did," said Tangi Le Libous, an analyst at the brokerage house Aurel BGC.

The yield on French 10-year bonds rose modestly to 3.065 percent on Friday after the reports of the imminent downgrade, from 3.032 percent on Thursday.

"The CDS (credit default swaps) market and the bond rates show that the market is already pricing in lower ratings," the analyst said.

S&P executives have said much the same.

"There's no automatic correlation" between the ratings downgrade and financing costs, said S&P's chief economist for Europe, Jean-Michel Six, pointing to the case of the United States.

The US rating was cut by S&P in August from triple-A to "AA+" but Washington has not experienced any deterioration in its access to the markets. In fact, its borrowing costs continued to fall on safe haven sentiment as investors pulled funds out of eurozone bonds and bought US Treasury bonds.

Furthermore, the warning by S&P that it was putting the entire eurozone on downgrade watch did not trigger panic on the financial markets, "because it was seen as one more argument to kick governments into action," said IHS Global Insight economist, Timo Klein.

"Governments tend to distance themselves from the judgements of ratings agencies so as not to give the impression that they're in thrall to them," the analyst said.

"It's confidence in long-term stability that is crucial and which governments should be working to restore. All the rest is just short-term repair work, which won't solve the problem in the long term," he said, referring to persistent calls by some governments for the European Central Bank to do more by buying up unlimited amounts of debt.

Date created : 2012-01-13


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