France’s standing as one of the world’s safest borrowers was affirmed by Standard & Poor’s, reflecting confidence that the euro-area’s second-largest economy will rein in its budget deficit.
At the end of a year in which rating companies downgraded the debt of European nations from Spain to Ireland, New York- based S&P said yesterday that France deserves a AAA sovereign credit rating because of the “wealth and depth” of its economy and the view that President Nicolas Sarkozy’s government will consolidate its budget gap.
The announcement may encourage investors to buy French debt after analysts this week speculated the euro-area’s sovereign debt crisis might cost France its top grade. Fitch Ratings yesterday lowered Portugal’s credit ranking by one level and separately said the turmoil in Europe reflects investor concern about the euro’s “viability.”
“It may placate the market in the near term, make it feel a little bit better, but in the longer term, everyone’s a little suspect that Europe still has problems and it’s going to be difficult for them to overcome,” said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston.
The cost of insuring French government debt rose to a record this week, having tripled this year. The country’s credit default swaps are now more expensive than those of lower-rated securities from the Czech Republic and Chile, according to data provider CMA.
France’s top credit rating was vulnerable to a rethink by the credit rating companies because of its budget deficit and because its banks are the biggest holders of debt issued by so- called peripheral countries, analysts said before yesterday’s announcement.
In a riposte to those concerns, S&P analysts including Madrid-based Marko Mrsnik said in their report that Sarkozy’s government will meet its goal of reducing its general deficit to 3 percent of gross domestic product in 2013 even if that means adopting extra measures.
The gap will decline to just below 6.2 percent in 2011, the analysts said in their report, compared with 7.7 percent this year and the government’s projection of 6 percent. Economic growth will be about 1.7 percent next year, they forecast, below the government’s 2 percent estimate.
“The government will likely adopt further deficit and debt-reduction measures, despite what we view as risks of political maneuvering in the wake of the 2012 presidential and general elections,” the S&P analysts said. “If economic growth is more in line with our forecasts than those of the government, we believe that the government would likely take additional fiscal measures to achieve its targets in order to stabilize the government debt burden.”
Failure to regain order of its budget would mean France’s top rating would come under “downward pressure,” it added.
“S&P is giving Sarkozy a little bit of the benefit of the doubt here” after a recent revamp to the country’s pension program suggests “France can be reformed after all,” said Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington.
France this week scaled back its debt-sale plans for 2011 as buybacks and improved cash management reduce financing needs, the nation’s debt management office said. The government will sell 184 billion euros in medium- and long-term debt next year instead of the 186 billion euros planned in September, Agence France Tresor said Dec. 21. That compares with the 188 billion euros of bonds France issued in 2010.
The vote of confidence in France came hours after Fitch cited concern about the “financing environment” for Portugal’s government and banks as well as the economic outlook as it cut the nation’s long-term foreign and local currency issuer default rating to A+, the fifth-highest level, from AA-. The outlook is negative.
The company said in a separate report yesterday that while the “euro zone’s underlying credit fundamentals are stronger than current levels of risk pricing indicate, Fitch believes that the crisis is systemic in as much as it reflects concerns about the viability of the euro as well as country-specific vulnerabilities.”
Confidence in public finances and banks will stay “fragile” and “credit profiles will deteriorate further” until economic recoveries are secure, it said.
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. S&P is reviewing its assessments of Ireland, Portugal and Greece.
Such warnings were frequent in 2010 as the debt crisis engulfed first Greece and then Ireland, forcing policy makers to issue bailouts and search for policies to protect the euro-area from contagion. Having established a rescue fund of about $1 trillion in size in May, European Union leaders agreed last week to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013.
“I don’t think this situation is anywhere near resolution as far as the market is concerned,” said Schlanger. “We’re going to flip the calendar, turn the page, start a new year and begin to focus on sovereign risk once again.”
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