Bourse
Eco Focus - Edition January 17, 2012
France's loss of its AAA rating and its effects
Rating agency Standard & Poor's (S&P) announced on Friday 13 January 2012 that it was downgrading the sovereign credit rating of France and eight other eurozone countries. For France, the downgrade is likely to mean higher long-term interest rates for the foreseeable future, which will increase the debt burden and adversely affect budget balances. France has sufficient fiscal elbow room to absorb the higher borrowing costs. Moreover, the effects on the business climate should be relatively limited.
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Content:
- Why has France lost its Triple A rating? - A harsh, partly unjustified, decision - A modest negative impact on activity |
Extract: Higher bond rates
The rating downgrade should at first sight push up the risk premium required by investors. The OAT-Bund spread could widen, therefore, even if its current level of 130bp already reflects the effects of the loss of the triple A rating. This will affect public deficits, but to a limited extent. A 100bp increase in OAT interest rates would increase the cost of public debt by around 2 billion euros in the first year, or 0.1% of GDP, and by 4 billion euros in the second year, or 0.2% of GDP. The widening of the deficit would add on to the cost of the economic slowdown, so further savings would in all likelihood be necessary. But this would still be manageable, thanks to the leeway available to the country. It should also be emphasised that while the interest rate trend is to the upside, rates remain at historic lows of around 3%, compared with an average 4.10% in 2000-2011. |
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