France's AAA Grade at Risk as Rating Cuts Spread: Euro Credit
France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut.
Moody’s Investors Service said Dec. 15 it may lower Spain’s rating, citing “substantial funding requirements,” and slashed Ireland’s rating by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece. Costs to insure French government debt rose to a record today with the country’s credit default swaps more expensive than lower-rated securities from the Czech Republic and Chile.
“Every sovereign may get penalized in the year ahead,” said Toby Nangle, who helps oversee $46 billion as director of asset allocation at Baring Asset Management in London. “It would be a big deal if France was to have its AAA rating stripped. I don’t think the likelihood of a downgrade is reflected in the market.”
European Union leaders agreed last week to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013 in an effort to stem contagion that started more than a year ago in Greece. Government bond yields climbed across the region even after Greece and Ireland were rescued and a backstop facility worth about $1 trillion was created.
“If problems in the euro zone aren’t solved quickly, then the conditions of refinancing will be expensive for these countries and the ratings agencies will do more downgrades,” said Ralf Ahrens, who helps manage about $20 billion as head of fixed income at Frankfurt Trust. “We already see these dynamics in the market. I see France as a risk.”
Moody’s said as recently as August that France, the U.S. and the U.K. probably will retain their top credit ratings as the nations work to cut their deficit. S&P said in an article published Dec. 1 in the French newspaper Les Echos that the country deserves its AAA status.
France’s credit rating is susceptible unless the country makes “meaningful reductions” to its deficit, said Padhraic Garvey, head of developed-market debt strategy at ING Bank NV in Amsterdam. The nation’s banks are the biggest holders of debt issued by the region’s so-called peripheral countries, posing possible “systemic risks,” added Markus Ernst, a credit strategist at UniCredit SpA in Munich.
Costs to insure French government debt trebled this year, rising to an all-time high of 105.5 basis points today, according to data provider CMA. Credit default swaps tied to Czech securities gained 1 basis point to 91 and Chilean swaps were little changed at 89 basis points.
The credit default swaps tied to the French bonds imply a rating of Baa1, seven steps below its actual top ranking of Aaa at Moody’s, according to the New York-based firm’s capital markets research group.
Contracts on Portugal imply a B2 rating, 10 levels below its A1 grade, while swaps tied to Spanish bonds trade at Ba3, 11 steps below its Aa1 ranking, data from the Moody’s research group show. Derivatives protecting Belgian debt imply a rating of Ba1, nine steps below its current rating of Aa1.
In Belgium, seven political parties involved in coalition talks are sparring over whether to grant more fiscal autonomy for the country’s regions after inconclusive elections in June left it without a government. The public debt of Belgium is close to 100 percent of gross domestic product, and 65 billion euros ($87 billion) of the nation’s bonds and bills are due to mature next year, according to data compiled by Bloomberg.
“Belgium’s prolonged domestic political uncertainty poses risks to its government’s credit standing,” S&P said in its Dec. 14 report that lowered the country’s outlook to “negative” from “stable.”
The European Union agreed in October to establish a European Stability Mechanism to deal with nations struggling to meet debt payments. The finance ministers of the 16 nations sharing the euro said Nov. 28 that “an ESM loan will enjoy preferred-creditor status, junior only” to International Monetary Fund loans.
The statement, which means bondholders rank behind those emergency loans, prompted S&P to warn it may lower the BB+ rating on Greece and A- long-term rating on Portugal. The decision also deepened the crisis, Morgan Stanley analysts said.
“The current stage of the global sovereign debt crisis is the consequence of a demotion of government bonds in the liability structure of governments,” Arnaud Mares, an executive director at Morgan Stanley and former senior vice president at Moody’s, said in a Dec. 6 investor note.
Spanish funding needs for “regional governments and the banks make the country susceptible to further episodes of funding stress,” Moody’s analyst Kathrin Muehlbronner said in a Dec. 15 report.
Moody’s on Greece
Moody’s placed Greece’s Ba1 bond ratings on review last week for a possible downgrade, citing heightened concerns about the country’s ability to cut its debt to “sustainable levels.”
Ireland’s credit rating was cut by Moody’s to Baa1 from Aa2 on Dec. 17 and the company said further downgrades are possible as the government struggles to contain losses in the country’s banking system.
Irish lawmakers voted last week to accept an 85 billion- euro aid package from European governments and the International Monetary Fund to help stabilize the country’s financial system. Greece earlier this year became the first euro nation to seek external support.
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