French Credit Swaps Fall as Investors Shun Debt Downgrade

General View of Bordeaux
France’s long-term foreign- and local-currency grade was lowered one step to AA from AA+, S&P said in a statement today. Photographer: Balint Porneczi/Bloomberg

The cost of insuring against a French default fell to the lowest in more than three years, as investors ignored a sovereign-credit rating downgrade by Standard & Poor’s.

Credit-default swaps on France fell for a sixth day, declining 1 basis point to about 51 basis points at 1:45 p.m. That would be the lowest closing price since April 20, 2010. The contracts have fallen from 219 basis points on Jan. 13, 2012 when France lost its top rating at S&P.

“You need to ignore the S&P downgrade of France,” said Harvinder Sian, fixed-income strategist at Royal Bank of Scotland Group Plc in London. “It is behind the market.”

The nation’s long-term foreign- and local-currency grade was lowered one step to AA from AA+, S&P said in a statement today. The outlook on the new grade, the third highest, is stable, according to the rating company.

“The French government’s current approach to budgetary and structural reforms to taxation, as well as to product, services, and labor markets, is unlikely to substantially raise France’s medium-term growth prospects,” S&P said.

Investors have largely disregarded such downgrades, reflecting a shift from reliance on ratings companies to a focus on in-house analysis. Since S&P’s first downgrade of France, French government bonds returned more than 10 percent, according to the Bloomberg France Sovereign Bond Index.

U.S. 10-year Treasury yields were 2.6 percent today, almost unchanged from the 2.56 percent on Aug. 5, 2011, the day S&P stripped the country of its AAA rating.

ECB Impact

Today, French bonds fell, sending 10-year borrowing costs up. The yield on France’s 1.75 percent securities due in May 2023 rose three basis points to 2.19 percent, about 20 basis points less than the 2024 securities the nation sold for the first time yesterday.

After the European Central Bank reduced its benchmark rate to a record low of 0.25 percent, “any rating-induced widening should thus be bought,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG in Frankfurt. “We believe the negative impact from the downgrade should be offset by the ECB rate cut.”

French Finance Minister Pierre Moscovici criticized the ratings cut and defended President Francois Hollande’s policies as a “massive” attempt to restore economic health. In the past year, the president has cut payroll taxes, loosened labor laws to make firings easier and lengthened working lives.

‘Solid’ Credit

“France is and will remain a country whose credit is solid and that will continue to finance its debt at among the most attractive rates in the world,” the finance minister said on France Info radio.

France lost its AAA level at Fitch Ratings in July, after Moody’s Investors Service lowered the country to Aa1 from Aaa in November last year.

Hollande said today that France’s low borrowing costs demonstrate confidence in his policies. The government is “doing everything” to reduce the deficit, improve competitiveness and create jobs, he told a news conference in Paris.

The Socialist president, whose popularity is at a record low, has faced increasing resistance as he seeks to raise taxes to trim the budget deficit. He decided last week to suspend a truck levy in the face of protests, two days after backing down on a plan to increase taxation on savings programs.

French gross domestic product will expand 0.2 percent this year and 0.9 percent next year, before increasing 1.7 percent in 2015, the European Commission said earlier this week. That’s in line with the Hollande government’s own forecasts. As a percentage of GDP, public debt will climb to 96 percent in 2015 from 90.2 percent in 2012 when Hollande succeeded Nicolas Sarkozy, the commission predicted.

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