France's top credit rating at risk, Moody's warns

21st November 2011, Comments 0 comments

A rise in the borrowing rate on French debt bonds and possibly slowing growth could have a negative effect on France's top AAA credit rating but not immediately, Moody's warned on Monday.

France is fighting desperately, with two recent rounds of extra budget measures, to retain its top credit rating which is also essential to the EU rescue fund for eurozone countries in difficulty.

"Last week, the difference in yield between French and German 10-year government bonds breached 200 basis points, a euro-era record amid increased economic and financial market uncertainty in the region," Moody's Investors Service warned.

"Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications."

Moody's senior credit officer Alexander Kockerbeck said in a note on Moody's website that after France's 6.98 billion euro ($9.0-billion-dollar) two- and five-year government bond auction Thursday, the spread between French and German 10-year bonds narrowed to 185 basis points (bp).

"Nevertheless, at this spread the French government would pay nearly twice as much as Germany for long-term funding. A 100bp increase in yields roughly equates to an additional three billion euros in yearly funding costs.

"With the government's forecast for real GDP (gross domestic product) growth of a mere 1.0 percent in 2012, a higher interest burden will make achieving targeted fiscal deficit reduction more difficult."

However, Moody's said the rate of 3.70 percent signalled last week by the market in French 10-year bonds was still "moderate and below the 4.15 percent historical average."

Moody's said that new issue yields did not materially affect a country's overall average cost of outstanding debt for several years.

"But likewise, once a period of elevated borrowing costs becomes embedded, it can take years to unwind," it said.

France had locked in very low medium- and long-term borrowing costs in 2009, 2010 and the first nine months of 2011.

The status of French bonds as benchmarks in the eurozone allowed the French government to borrow at such low costs even during the worst moments of the global financial and economic crisis.

But Moody's said: "Since 2008, France's budget deficit and debt metrics have deteriorated considerably, exacerbating the adverse relationship between high public indebtedness and economic growth".

The French government's latest response in terms of extra measures to reduce the public deficit implied 115 billion euros' worth of overall fiscal correction for 2007-16.

"That announcement, the second budgetary correction since summer, attests to the government's credit positive commitment to control public finances, provided measures are fully implemented and do not undermine economic growth.

But it said the outlook for economic growth and the European debt crisis "are important risk factors for the government's balance sheet".

"The French social model cannot be financed if the French economy's potential is not preserved. With further weakening GDP growth the political scope for the government to generate further savings in this case would be tested."

Moody's also noted that the way the eurozone handles its debt crisis "will influence the value and credit quality of sovereign assets on French banks' balance sheets and affect their funding costs and capacity to lend and bolster the economy."

This could increase pressure on public finances if further government support for the banks was needed.

The deterioration in the debt profile and the potential for further liabilities are exerting pressure on France's creditworthiness and the stable outlook "though not at this stage the level" of the Aaa debt rating, Moody's said.

© 2011 AFP

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