France Downgrade Would Hit All of Europe: Analysts
French leaders came out fighting this week against rumors that their country's coveted AAA credit rating was under threat, but the reverberations of a French downgrade would be felt around Europe, analysts told CNBC.
“It’s a real issue for markets and for investors to see that change in rating,” Philippe Waechter, Head of Economic Research, Natixis Asset Management, told CNBC Friday.
Rating agency Standard & Poor's (S&P) put France on negative watch earlier this month.
There are worries about the effect of a French downgrade on the European Financial Stability Facility (EFSF), the euro zone bailout fund. S&P has already warned that, if one of the six triple-A rated member countries loses its rating, it is likely to downgrade the EFSF to the same rating. This could make it more expensive for the EFSF to raise money, at a time when expanding its capacity is crucial.
At a time of increased froideur between the French and the UK, following UK Prime Minister David Cameron’s rebuttal of proposed EU treaty changes last week, there have been direct attacks flying across the English Channel.
On Thursday,Bank of France Governor Christian Noyer said the UK deserved to lose its triple A rating before France.
“They should begin by downgrading the United Kingdom which has bigger deficits, more debt, higher inflation, less growth than us and where credit is shrinking,” he said.
French Finance Minister François Baroin said Britain was “marginalized” and faced “a very difficult economic situation.”
“We just want to keep it because we feel we are still a very strong economic nation and we don’t have many more problems than the English. We want to keep ours if the UK keeps theirs,” said Waechter.
There are some positive economic signals coming out of France. The country is paying down its state deficit, which fell to 99.4 billion euros ($129.5 billion) at the end of October, significantly below 133.1 billion euros at the same time in 2010. This has been achieved by cutting state spending, which is projected to fall by 10 percent this year, and increased tax receipts.
Flash December PMIs showed improved readings for France in both manufacturing, which rose from 47.3 in November to 48.7 in December, and services, up from 49.6 to 50.2. However, the comparative UK indices were above 50.
Yields on French 10-year bonds have risen recently, but are still hovering at just above 3 percent.
Yet, in common with much of the developed world, it is still struggling with growth and facing the possibility of entering recession again next year.
“The most important thing is growth rather than the triple-A rating,” said Waechter.
“We have to think about how to handle the risk of a drop in economic growth. If we can manage that, we can manage our rating.”