France Likely to Lose Top Rating (along with reductions elsewhere in Europe): S&P

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    Oct 21, 2011 2:01 PM GMT
    With the French banking sector effectively insolvent, expect this to get a lot worse.

    France is among euro-region sovereigns likely to be downgraded in a stressed economic scenario, according to Standard & Poor’s.

    The sovereign ratings of Spain, Italy, Ireland and Portugal would also be reduced by another one or two levels in either of New York-based S&P’s two stress scenarios, the ratings firm said in a report dated today. These assume low economic growth and a double-dip recession in the first set of circumstances, and add an interest-rate shock to the recession in the second.

    “Ballooning budget deficits and bank recapitalization costs would likely send government borrowings significantly higher under both scenarios,” S&P analysts led by Chief Credit Officer Blaise Ganguin in Paris wrote in the report. “Credit metrics would deteriorate sharply as a result.”

    S&P is seeking to take account of the economic slowdown that hit Europe in the second quarter and which has led the ratings company to trim 2012 growth forecasts to an average of between 1 percent and 1.5 percent. France would follow the so- called peripheral euro-region nations that have already been downgraded, with Moody’s Investors Service saying earlier this week that its top rating was under threat.
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    Oct 21, 2011 2:20 PM GMT
    Although this news may seem unfortunate and dramatic, in real terms it won't affect France's recovery policies for 2 reasons:

    1) The EU central bank provides much cheaper rates of lending than the international wholesale markets. Even though the ECB is stretched at the moment the sums France might request of them would be more than doable considering the principles of modern money mechanics.
    2) France's government like many of the bigger economies of Europe (and the western world) are currently trying to reduce deficits and cut their exposure to public debt (internal and external), so the fact that France's credit rating has dropped bares little relevance when they don't want to take on more debt ATM.

    The real issue is with the public. Such news can lead to frenzied liquidation of French assets and this could have real implications for their economy.
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    Oct 21, 2011 2:23 PM GMT
    I really hope that the Federal investigation into S&P leads it to being shuttered through RICO laws. It's history of fraud should be enough to put it out of business.
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    Oct 21, 2011 2:30 PM GMT
    supernoob saidAlthough this news may seem unfortunate and dramatic, in real terms it won't affect France's recovery policies for 2 reasons:

    1) The EU central bank provides much cheaper rates of lending than the international wholesale markets. Even though the ECB is stretched at the moment the sums France might request of them would be more than doable considering the principles of modern money mechanics.
    2) France's government like many of the bigger economies of Europe (and the western world) are currently trying to reduce deficits and cut their exposure to public debt (internal and external), so the fact that France's credit rating has dropped bares little relevance when they don't want to take on more debt ATM.

    The real issue is with the public. Such news can lead to frenzied liquidation of French assets and this could have real implications for their economy.


    This ratings fall is, I suspect, just the beginning. The next question though is how long the Euro will survive. Where it is of relevance is the fact that borrowing costs will increase - though ratings are I think a far worse proxy than CDS's.

    I wouldn't expect the EU central bank to be willing to lend considerably more considering the money comes from the borrowing capacity of member states - particularly Germany and given how much they have been upset over Greece, do you really think they are open to that much more borrowing?

    Given the state of their banking sector, France could also be forced to borrow considerably more to bail them out.