Business World

Sunday 17 December 2017

France points finger at Britain over credit downgrade

euro crisis

Mark Deen

French leaders are girding for the loss of the nation's top credit grade, with France's central bank governor taking a swipe at Britain as he called debt-rating companies "incomprehensible and irrational".

His comments came after French president Nicolas Sarkozy was reported to have called UK Prime Minister David Cameron an "obstinate kid''.

Standard & Poor's said last week it may lower France by two levels in a euro-area downgrade stemming from the failure of the region's leaders to arrest a debt crisis that began in Greece in 2009 and now presents the biggest threat to the world economy.

"A downgrade doesn't strike me as justified based on economic fundamentals," Bank of France governor Christian Noyer told 'Le Telegramme', a newspaper based in Brittany.

"Or if it is, they should start by downgrading the UK, which has a bigger deficit, as much debt, more inflation, weaker growth and where bank lending is collapsing."

A cut by S&P or Moody's, which said this week it will review European ratings, may complicate Europe's efforts to stem the crisis by threatening the rating of the region's bailout fund.

The European Financial Stability Facility, which funds rescue packages for Greece, Ireland and Portugal partially with bond sales, owes its AAA rating to guarantees from the six top- rated euro nations. A downgrade may prompt investors to demand higher rates on the fund's debt and force greater action by the European Central Bank.

"A French downgrade could come sooner than envisaged," said Thomas Costerg, an economist at Standard Chartered Bank Plc in London.

"There could be a domino effect on confidence, not to mention the sizeable impact on the EFSF."

Mr Sarkozy has tried to minimise the potential impact of a downgrade, calling it "not insurmountable" in an interview published in 'Le Monde' on December 12, three days after an all-night summit in Brussels that he had said was the last chance to save the euro.

"If rating companies pull it, we'll face the situation coolly and calmly," Mr Sarkozy told the newspaper.

"It would be an additional difficulty but it's not insurmountable. What is important is the credibility of our economic policy and our strategy of reducing spending."

Of the six top-ranked euro-region countries, France has been the most vulnerable. The extra yield demanded to lend to France for 10 years was 120 basis points more than the German rate today.

The gap was 200 basis points on November 17, the widest since 1990, up from 28 in April. The French 10-year yield was at 3.1pc, about 72 basis points more than the AAA rated Finland and 100 points more than the UK.

It currently costs 237 basis points to ensure French five- year bonds, more than twice as much as the UK and more than the costs of insuring debt issued by Indonesia or the Philippines, prices show. (Bloomberg)

Irish Independent

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