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Concern for France's AAA rating as 10-year bond yields rise

Investors are becoming increasingly concerned about France’s overall debt and deficit levels.

THE INTEREST RATE France pays to borrow money was rising again Monday — and along with it fears that the country will lose its cherished AAA credit rating.

Theoretically at least, that rating — the highest a nation can have — allows France to borrow money from the markets cheaply. But France pays more than other European countries that have a Triple A — like Denmark, the Netherlands and Switzerland.

Today, the yield on its 10-year bond — the usual yardstick for a country’s borrowing costs — rose 0.05 per cent to 3.42 per cent. That’s twice Germany’s and more than the average rate for a 15-year mortgage in the US.

Some say with yields that high, France retains the AAA rating in name only, since the country has already lost the benefit of the rating, namely low borrowing costs.

No one is actually expecting France to default, but its higher yields reflect investor concern about France’s fundamentals: its overall debt load and the deficit it runs. And, since the credit ratings of France and Germany underpin the eurozone stability fund set up to tackle Europe’s debt crisis, a change in the French rating could be seismic, affecting the entire bailout plan.

Presidential election

Not to mention the fact that a lower credit rating could mean that President Nicolas Sarkozy gets tossed out of office in next spring’s presidential election.

“Let’s not delude ourselves: In the markets, French debt is already not AAA,” Jacques Attali, an economist and adviser to Sarkozy, told La Tribune recently.

The government roundly denounced that comment, and Christian Noyer, the governor of the Banque de France, told Le Figaro newspaper it was preposterous to think that France wouldn’t repay its debts. That, in effect, is what a rating measures: It’s the agency’s assessment of how good a bet a country or a company is for investors.

Still, France hasn’t balanced a budget in three decades, and its deficit ran 7.1 per cent of its GDP last year — more than twice the legal limit of 3 per cent in the eurozone. It also is part of the 17-nation eurozone, and is paying a significant amount to help bail out other troubled members such as Greece, Portugal and Ireland.

Rating impact

The credit rating also has psychological and political importance — especially as France heads into an election year. Sarkozy, who is already suffering from very low poll numbers, and his conservative party know that losing the rating could seal their fate in the two-round election next April and May.

Sarkozy has not yet said he’s running, but it’s widely assumed he’ll be the conservative UMP party’s candidate.

Sarkozy has staked his credibility on meeting a series of deficit-reduction targets and balancing the budget by 2016. In order to stay on track, his government has been forced twice this year to introduce a raft of extra cuts.

And many say those savings are still not enough, with growth so slow — France just recently lowered next year’s growth forecast to 1 per cent.

“The question is not if France will be downgraded, the question is to know when France will be downgraded,” said Marc Touati, an analyst with Assya Compagnie Financiere.

France had a preview of what the loss of the AAA rating might look like last week when a mistaken alert by Standard & Poor’s told some clients that France had been downgraded. The agency corrected the note an hour and a half later, calling it a technical error and confirming that France’s rating remained at AAA and its outlook was stable.

In the interim, however, bond yields jumped several tenths of a percentage point and have not yet settled to where they were before the error.

The back-and-forth over France’s rating is not just talk: Moody’s said last month that it is reviewing the country’s outlook — the part of the rating that indicates where the agency thinks the country is going. For now, that outlook is stable, but that could change. If it does, that could also send borrowing costs up.

If France does get downgraded to AA+, it would still be in good company: Standard & Poor’s downgraded US debt to that level in August.

Associated Foreign Press
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