French bonds drop as S&P lowers credit rating for a second time
FRANCE'S government bonds declined yesterday after ratings agency Standard & Poor's (S&P) lowered the country's sovereign-credit rating by one level.
Spanish bonds also dropped following a rally on Thursday when the European Central Bank (ECB) unexpectedly cut its key interest rate to counter a risk of deflation.
All three major rating agencies had already stripped France of its top-grade triple-A status. But S&P was the first to downgrade it for a second time, to AA from AA+, warning that the economic reforms of the past year were not sufficient to lift growth.
The move heaps pressure on President Francois Hollande, who is facing strikes from farmers in Brittany and top professional football clubs over high taxes.
Mr Hollande, battling to bring France's public deficit in line with EU targets, has given way on several planned tax rises, including a levy on corporate profits and new charges on special savings products.
Football clubs plan to strike next month over a "super-rich" tax they will have to pay on their top earners.
Local protesters – wearing red bonnets in a nod to the region's 17th-century peasant revolts – fear the "ecotax" due to be imposed on heavy goods traffic from January will further hit their business.
They have destroyed more than two dozen sensor-based toll gates erected over major routes.
"French yields rose slightly after the downgrade but we expect any increase to be limited as the move has been largely expected," said Ciaran O'Hagan, head of European interest-rate strategy at Societe Generale in Paris.
"The news may have provided some impetus for the market to take profits on Italian and Spanish bonds after a big rally yesterday. But in the bigger scheme of things, the impact will probably be limited."
The yield on France's 1.75pc bond due in May 2023 increased three basis points at lunch time yesterday.
The French government-bond market is the second biggest in the euro area, trailing only Italy, and is the fourth largest among global sovereign-debt markets.
Mr Hollande said his Socialist-led government was committed to making all possible budget saving measures but not at the price of sacrificing France's generous welfare model.
"This policy . . . is the only one that can guarantee our credibility and we can judge that from the low interest rates on the markets," he said at a World Bank conference in Paris.
Outspoken industry minister Arnaud Montebourg said credit rating agencies had "no credibility".
"If we pushed this logic to its conclusion, I think states should start to grade the ratings agencies," he said. "There would be many dunce's hats to distribute."
(Bloomberg with additional reporting from Reuters)