An S. P. downgrade provides no truly new information about the euro region’s debt struggle, now entering its third year. But the move at least symbolically places the crisis squarely on the doorstep of the Continent’s second-biggest economy after Germany — which retains the AAA credit rating of which France can no longer boast.
Keeping that top credit rating had long been a badge of honor for France — and a political point of pride for President Nicolas Sarkozy, who now enters a difficult re-election campaign with a stigma that his opponents will no doubt seek to exploit.
Mr. Sarkozy had often boasted of France’s gilt-edged standing, and the looming prospect of its loss had recently become a prime topic of political discussion, a hot issue on talk shows and fodder for comedians and political cartoonists.
But whether the S. P. downgrade will have a market effect on France’s cost of borrowing money is something only the coming months and weeks will tell.
Indeed, because the demotion has been widely anticipated, French officials have said the impact will be manageable. French debt, and that of most other euro zone governments, was already trading as if a downgrade had happened. Yields on French 10-year government bonds have been than a percentage point above Germany’s, the European benchmark.
“It isn’t the end of the world” for France, said Jacob Funk Kirkegaard, an economist at the Peterson Institute for International Economics in Washington. “There will be a lot of terrible headlines,” he said in an interview before the official announcement of an S. P. downgrade, “but it’s not going to cause French bonds to decline a lot on a persistent basis.”
But France’s credit rating does have broader implications for the euro zone. France is one of the major financial backers of the European rescue fund, the European Financial Stability Facility, which is meant to prevent the credit contagion that began in Greece from spreading to large countries like Italy and Spain.
The price of its rescue fund, whose borrowing costs depend in part on the credit ratings of its contributing nations, will now probably rise because of the downgrades to France and others. Higher costs could make the fund less effective in stemming the euro crisis.
Many French leaders have noted that S. P.’s downgrade of the United States’ AAA credit rating in August had not stopped investors from flocking to Treasury securities. To a large extent, though, the United States has a special safe-haven status, as the world’s largest economy and as a financial power outside the euro zone, that France does not.
At the time S. P. issued the American downgrade last summer, it had warned that France — of all the major economies that still held the highest credit grade — was the most vulnerable because its finances were being eroded by the European crisis. That warning came as the stocks of two of the country’s biggest banks — Société Générale and BNP Paribas — were being hammered by investors amid rising concern that they had been weakened by the crisis. The shares of both banks have continued to decline since then. Many French and European officials have accused the ratings agencies of fanning the flames. As Europe’s crisis wore on, each time a troubled country — whether Spain, Ireland, Portugal or Greece — announced a new program to improve its finances, they said, S. P. or Moody’s or Fitch crushed confidence by issuing fresh downgrades or warnings shortly thereafter.
Indeed, French officials were livid in November after S. P. erroneously sent out an e-mail saying that it had already lowered the rating on France’s sovereign debt. The company quickly apologized, but the French finance minister, François Baroin, opened an investigation.
Until December, Mr. Sarkozy had warned that a downgrade would bite, especially as he outlined two back-to-back austerity programs meant to reduce France’s budget deficit of nearly 6 percent of gross domestic product — as well as pare debt of 87 percent of G.D.P., the highest of any AAA-rated European country.
But with his main political rival, the Socialist candidate François Hollande, turning up the heat in the campaign, Mr. Sarkozy has reversed course, telling voters since then that a downgrade would be manageable.
That may be: French banks and others in Europe that hold piles of French government bonds are raising tens of billions of euros to meet new regulatory requirements to guard against a worsening of the crisis.
And while the credit rating of Europe’s current rescue fund may also be cut, European officials have already teed up a replacement, the European Stability Mechanism, whose operation does not depend as much on credit ratings. That is because governments would pump taxpayer money directly into the fund.
Nonetheless, France will have to work to renew its financial luster, especially if it is subsequently downgraded by other ratings agencies. French officials say their priority now is to demonstrate that the euro area is solid, while also showing that France is working to improve its own finances.
Mr. Sarkozy’s austerity programs, including higher taxes on items like some food and beverages that kicked in across France recently, are aimed at whittling the country’s budget deficit to 3 percent of G.D.P. by 2015.
They were also intended to prevent France’s international borrowing costs from rising to unhealthy levels. While French officials expect their measures to soothe investors, one senior finance official conceded in a recent interview that “there is some element of unpredictability” after a sovereign debt rating cut.
“Our job,” said the official, who spoke on condition of anonymity, “is to explain things and to do what is necessary to make sure that, independent of our rating, France remains rock-solid.”
Article source: http://www.nytimes.com/2012/01/14/business/global/in-france-the-pain-of-rating-downgrade-is-especially-acute.html?partner=rss&emc=rss