French financial meltdown fails to materialise after downgrade

Exactly one week after rating agency Standard and Poor’s downgraded France from AAA to AA+ the expected economic fallout has yet to become reality. 

Reuters/Mal Langsdon

France has so far defied predictions and is, if anything, faring better on financial markets after the downgrade than it did before.

On Thursday, European stock markets rose and the euro climbed against the dollar after a successful sale of French government bonds at interest rates below their pre-downgrade level.

The average yield on benchmark 10-year bonds dropped to 1.07 per cent from
2.32 percent in the last comparable sale on 17 November. The rate of return on short-term bonds also dropped considerably, by about 0.5 to one per cent.

Two factors are said to be behind the financial markets apparent indifference to the downgrade:

• The rating agency Moody’s had already put France on a downgrade watch back in October, giving markets the chance to anticipate  the move and for interest rates to start to climb;
• At the time it was suggested France could be downgraded by two notches, so the one notch came as a relief to financial markets.

And France has benefitted from the discreet intervention of the European Central Bank which has been pouring money into the eurozone.

Under the terms of its new lending schemes, eurozone banks have deposited more than 500 billion euros of assets with the ECB in return for cash, which many have invested in sovereign bonds.

The ECB provided banks with nearly half a trillion euros of three-year money in December, called LTRO, and will make a similar offer in February. The bank usually offers money over a one-year period.

In an interview on the Europe 1 radio station on Friday, prominent economist Jacques Attali, said few people had realised that the ECB move had changed everything in Europe.

“It was really a considerable move, to buy up everything that was on the market,” he said. “The Central Bank has spent more money saving the euro than the American Central Bank [Federal Reserve] spent on saving the dollar.”

Attali said the ECB move was a way of stabilising the eurozone’s bad boys and prevent them from going under, dragging France with them.

But, some politicians here in France are still having trouble coming to terms with the agency downgrade.

It was a humiliation for President Nicolas Sarkozy who told aides "If France loses its AAA, I'm dead," in October, according to Le Canard enchaîné weekly. And it had led to calls for financial markets to pay less attention to credit ratings.

European Affairs Minister Jean Leonetti said on Friday that S&P had lost credibility and credit ratings by these agencies are no longer a reference point for the French and European economies.

“Standard & Poor’s is suffering since it has been shown that downgrading the credit rating has had no effect,” he said in an interview on Europe 1.

But the eurozone is not yet out of the woods. European stocks and the euro slipped on Friday as investors locked in profits ahead of the weekend, waiting to see whether Greece can finally strike deals that would help cut its towering debt mountain.

And European leaders are to meet in Brussels on 30 January to hammer out a deal to enhance economic and fiscal rules in the eurozone.