Published December 07, 2011
France will lose its AAA credit rating early next year regardless of last-ditch efforts by President Nicolas Sarkozy to resolve the euro zone crisis at an EU summit this week, a Reuters poll of economists showed on Wednesday.
The snap survey of 13 economists found that 11 of them think France will be downgraded by one of the major ratings agencies within the next three months.
The only question, following this week's blanket euro zone credit warning by Standard & Poor's, is whether France will be cut by one notch to AA+ or by two to a straight AA.
"If you apply Standard and Poor's methodology based on quantitative factors, France should already have a AA rating, as should the U.S. and Britain," said Jean-Christophe Caffet, economist at investment bank Natixis.
He noted, however, that ratings agencies take into account subjective criteria, such as the credibility of the government's budget plans, making it difficult to estimate the final outcome.
"Only the ratings agencies guys know that," he said.
Worries over France's credit rating have been mounting for weeks as the euro zone sovereign debt crisis has unfurled, spreading from Greece to Portugal and Spain, and even reaching the third-largest economy in the bloc, Italy.
Late on Monday, S&P warned it could carry out a mass rating downgrade of 15 euro zone nations within 90 days, depending largely on the outcome of Friday's EU summit to discuss tightening governance in the single currency bloc.
France was the only AAA country in the zone singled out for a possible two-notch downgrade, with S&P saying the country's growth forecast was overly optimistic, its deficit reduction plans inadequate and its banks liable to need state funds to patch up their balance sheets -- something the government has denied.
RECESSION WORSENING OUTLOOK
On the surface, French finances look no worse than those of EU neighbor Britain, whose triple-A rating is not in danger.
But France has come under particular scrutiny in markets due to its banking sector's exposure to Greek and Italian debt, and a weak growth outlook which is undermining the credibility of Sarkozy's deficit reduction plans.
The government says its latest deficit-reduction plan, unveiled in November, includes a 6 billion euro cushion, meaning its 2012 budget works even if growth is half the official target of 1 percent. But many economists regard even anemic growth of 0.5 percent next year as unobtainable and are predicting a recession for 2012.
Unlike in Britain, Sarkozy has shied away from swingeing spending cuts, preferring to focus on tax rises. Analysts doubt he can do much more in the run-up to an April election where he faces a struggle to defeat Socialist rival Francois Hollande.
"We think the economic scenario we have for next year, a 0.7 percent contraction, is not exactly conducive to France hitting its deficit target," said Guillaume Menuet of Citigroup.
"All in all we see lower growth, more contingent liabilities and greater support for the banks and if the government can't come up with reasonable plans, then a downgrade," he said.
In a break with the government's line, Prime Minister Francois Fillon acknowledged for the first time on Tuesday that France may need further budget cuts next year. [ID:nL5E7N60KJ]
EU INTEGRATION WILL TAKE TIME
Sarkozy and his German counterpart Angela Merkel on Monday unveiled plans, to be discussed in Brussels on Friday, to enforce euro zone budget discipline via treaty change.
However, a majority of analysts surveyed on Tuesday believe the plans for greater integration will fail to avert a near-term downgrade for France as they remain too vague. Above all, decisions on the treaty changes will not be settled until March.
"S&P wants real integration for a smaller group of 17 countries with genuine institutions and a sharing of budgets, and those are challenging requirements that can't be met by the end of the week," said Pierre-Olivier Beffy, economist at Exane.
Few economists in the Reuters survey thought a downgrade of France's triple-A status would have an impact on the country's borrowing rates, or indeed on markets in general.
Markets have already factored in a cut and when it does come, if anything the ratings agencies will merely be catching up with reality, some economists said.
The premium investors demand to hold French government bonds instead of their German equivalent hit a euro lifetime high of 200 basis points in mid-November. The spread has since narrowed to slightly more than 100 bps, partly because German borrowing costs have risen after Berlin had trouble placing its bonds at an auction last month.
The main impact of a French rating cut, according to the survey, would be on the credit-worthiness of the European Financial Stability Fund, which relies on the credit strength of its guarantors, mainly France and Germany.
"It highlights the fact that if the crisis really gets worse, the only institution that has the ability to put the fire out in the short-term is the European Central Bank," said Exane's Beffy.