Tuesday 17 October 2017

Top rating agencies rally to ease French fears

US markets still in freefall despite statement by Federal Reserve; Gold hits $1800/ounce, French banks under attack

Donal O'Donovan

Donal O'Donovan

The world's three main rating agencies were yesterday forced to back the French economy as rumours swirled that the country could lose its AAA status and that a major French bank was in trouble.

Moody's, Standard & Poor's (S&P) and Fitch took the unusual step of saying they had no plans to downgrade France in an effort to quash the rumours amid fears of a market melt-down.

Rumours of a possible French downgrade had been growing since the US credit rating was cut on Saturday before the usually tight-lipped rating agencies affirmed the AAA status late yesterday.

As nerves frayed across markets, shares in the biggest banks -- Bank of America, Citigroup, Goldman Sachs and Morgan Stanley -- skidded in New York.

The S&P 500 closed down 4.4pc, Bank of America was off 6.9pc and Citigroup fell 9pc.

While there is no fear that France could need an Irish-style debt bailout, there are worries its vital AAA credit rating could be lost if the European bailout mechanism has to be increased further.

Debt

The premium, or yield, investors demand to buy 10-year French debt rather than German bunds rose to 0.87pc despite the fact that both countries share AAA status and should be regarded as peers in credit terms.

The difference in borrowing costs has trebled over the past year.

"The rumours on the French triple-A rating are having a catastrophic impact, even despite the denial from credit agencies. Shorts are on a rampage; it's a calamity.

"This has nothing to do with fundamentals," said Christian Jimenez, fund manager and president of Diamant Bleu Gestion in Paris.

On the stock markets, French banks took a hammering.

Societe Generale (SocGen) plunged during the session, hitting a two-year low and finishing down 14.7pc at €22.18. It was down 21pc at one point.

Britain's 'Mail on Sunday' newspaper placed a correction on its website saying its report on Sunday that SocGen was in a "perilous state" was incorrect.

The shares plunged on a plethora of unverified rumours that swept the money markets until finally SocGen issued a blanket denial of all rumours -- without detailing any of the speculation.

"SocGen categorically denies all the market rumours," a spokeswoman said.

Other French banks also tumbled, with BNP Paribas falling 9.5pc to €35.61 and Credit Agricole dropping 11.8pc to €6.07.

France's finance ministry was also forced to formally deny rumours that the country was heading for a downgrade of its top AAA credit rating.

The announcement came hours after President Nicolas Sarkozy promised new measures to slash France's public deficit amid fears the country could be next after the US to suffer a top credit rating downgrade.

The new measures will be decided on August 24, the president's office said after Mr Sarkozy broke off a holiday on the French Riviera to return to Paris to hold an emergency government meeting on the crisis.

"The head of state reiterated that the commitments to reduce the public deficit are inviolable and will be adhered to no matter how the economic situation evolves," the Elysee said in a statement.

The French public deficit is estimated at 5.7pc of gross domestic product (GDP) this year and the government has vowed to reduce it to 4.6pc of GDP next year and to 3pc, the EU limit, in 2013.

But the International Monetary Fund said last month that France would probably need extra action to cut its public deficit in 2012 and 2013 as falling growth threatened to make the targets more difficult to meet.

"We expect that France, with its high public debt and deficit, and popular resistance to cutbacks in its extremely large welfare state, is now likely to be the G7 country at the highest risk of losing its AAA rating," Citigroup's chief economist Willem Buiter said yesterday.

He pointed out that the extra interest that France would pay to borrow compared with Germany reached a 16-year high of 90.7bps on Friday.

The premium is the highest since the European currency crises in 1994.

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