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France Braces for Debt-Rating Cut as Noyer Takes Aim at U.K.

Bank of France Governor Christian Noyer
Bank of France Governor Christian Noyer. Photographer: Kiyoshi Ota/Bloomberg

Dec. 15 (Bloomberg) -- French leaders are girding for the loss of the nation’s top credit grade, with the central bank governor taking a swipe at Britain as he called debt-rating companies “incomprehensible and irrational.”

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 U.K., 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 Investors Service, 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 sizable impact on the EFSF.”

‘Not Insurmountable’

French President Nicolas Sarkozy has tried to minimize the potential impact of a downgrade, calling it “not insurmountable” in an interview published in Le Monde on Dec. 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,” 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.”

Sarkozy, who has sought to protect his government’s creditworthiness by announcing tax increases and spending cuts, has attempted to position himself for a 2012 re-election campaign as the most credible candidate on economic matters.

Presidential Polls

Sarkozy trails his main rival, Socialist Party candidate Francois Hollande, by about 14 points in voting intention for the second round of the election, according to an LH2 poll published Dec. 11.

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 Nov. 17, the widest since 1990, up from 28 in April. The French 10-year yield was at 3.1 percent, about 72 basis points more than the AAA rated Finland and 100 points more than the U.K.

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

“We have put in place a credible plan for dealing with the deficit and the credibility of that plan can be seen in what’s happened to bond yields in this country,” Prime Minister David Cameron’s spokesman Steve Field told journalists in London in response to the Noyer remarks.

Budget Rules

Moody’s said on Dec. 12 it will review the ratings of all European Union countries after a summit on Dec. 8-9 failed to produce “decisive policy measures” to end the region’s debt turmoil. Standard & Poor’s placed the ratings of 15 euro nations, including AAA rated Germany, on review for possible downgrade on Dec. 5 pending an assessment of the summit.

At the summit, European leaders spelled out tougher budget rules and agreed to boost rescue funds from their central banks.

“There is more politics than economics” in the arguments that rating companies develop now, Noyer said. Noyer said he hasn’t been informed about any decisions yet to be announced.

Euro-area governments have to repay more than 1.1 trillion euros ($1.43 trillion) of long- and short-term debt in 2012, with about 519 billion euros of Italian, French and German debt maturing in the first half alone, data compiled by Bloomberg show. European banks have about $665 billion of debt coming due in the first six months, according to Citigroup Inc., based on Dealogic data.


Noyer’s comments are a case of “sour grapes,” said Klaus Baader, co-head of euro area economics research at Societe Generale in London. “One thing that differentiates the euro-zone countries is that they don’t have national central banks that can monetize debt.” So whatever the deficit figures, “markets are well aware that’s not really the point,” he said.

France has the biggest debt burden of the top-rated euro nations, at 85 percent of gross domestic product. Its financial institutions also have the largest debt holdings in the five crisis-hit countries, at $681 billion as of June, according to data from the Bank for International Settlements in Basel.

French credit quality has drawn attention since mid-October, when Moody’s said its financial strength had weakened, making its debt measures the weakest among its top-rated peers.

Sarkozy has unveiled two sets of budget cuts since August to preserve the credit rating and try to calm jittery markets. In November, France unveiled 18.6 billion euros in tax increases and spending cuts to defend the rating. It pledged to do more if necessary to reduce the deficit to 4.5 percent of gross domestic product in 2012 and 3 percent in 2013, from 5.7 percent in 2011.

U.K. Deficit, Debt

U.K. government debt amounts to 83 percent of gross of GDP and will rise to 86.5 percent next year, according to the International Monetary Fund. The U.K. Office for Budget Responsibility expects the government’s deficit to equal 8.4 percent of output in the year through March and 7.6 percent in the next fiscal year.

S&P stripped the U.S. of its AAA credit rating for the first time on Aug. 5, and subsequently the bond market rallied. S&P cited the nation’s political process and criticized lawmakers for failing to cut spending or raise revenue enough to reduce a record budget deficit. The yield on the benchmark U.S. government bond fell to a record 1.6714 on Sept. 23. They had closed at 2.558 on Aug. 5.

As with the U.S. downgrade, S&P’s reasoning for European downgrades cited flaws in the political process. The summit agreement in December was the fifth attempt to forge a comprehensive solution to the debt crisis since agreeing to provide Greece with a 110 billion-euro bailout in May 2010.

To contact the reporters on this story: Mark Deen in Paris at;

To contact the editor responsible for this story: Craig Stirling at

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