Moody’s Rating – French Banks Over-exposed?




The Socialist government has laid the blame for the latest downgrade of France’s rating, on the previous administration.

Europe’s Debt Crisis now threatening French banks? (Credit: Flickr Vectorportal)

But in the light of ongoing problems in Greece, Spain, Portugal and Italy as well as the former eastern Europe, readers might be forgiven for asking is the French banking system — bigger than France itself — safe? While this paper holds no candle for the big three ratings agencies(whose conflicted business models have much to answer for in the financial crisis that brought the global economy to its knees beginning 2007/8), here for the record, is Moody’s press release after it announced the downgrade of France’s government bond rating to Aa1 from Aaa:

Moody’s decision to downgrade France’s rating and maintain the negative outlook reflects the following key interrelated factors: 1.) France’s long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets. 2.) France’s fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand, and in the longer term due to the structural rigidities noted above. 3.) The predictability of France’s resilience to future euro area shocks is diminishing in view of the rising risks to economic growth, fiscal performance and cost of funding. France’s exposure to peripheral Europe through its trade linkages and its banking system is disproportionately large, and its contingent obligations to support other euro area members have been increasing. Moreover, unlike other non-euro area sovereigns that carry similarly high ratings, France does not have access to a national central bank for the financing of its debt in the event of a market disruption. Moreover, France’s credit exposure to the euro area debt crisis has been growing due to the increased amount of euro area resources that may be made available to support troubled sovereigns and banks through the European Financial Stability Facility (EFSF), the European Stability Mechanism (ESM) and the facilities put in place by the European Central Bank (ECB). At the same time, in case of need, France — like other large and highly rated euro area member states — may not benefit from these support mechanisms to the same extent, given that these resources might have already been exhausted by then. In light of the liquidity risks and banking sector risks in non-core countries, Moody’s perceives an elevated risk that at least part of the contingent liabilities that relate to the support of non-core euro area countries may actually crystallise for France. The risk that greater collective support will be required for weaker euro area sovereigns has been rising, most for notably Spain, whose economy and government bond market are around twice the combined size of those of Greece, Portugal and Ireland. Highly rated member states like France are likely to bear a disproportionately large share of this burden given their greater ability to absorb the associated costs. More generally, further shocks to sovereign and bank credit markets would further undermine financial and economic stability in France as well as in other euro area countries. The impact of such shocks would be expected to be felt disproportionately by more highly indebted governments such as France, and further accentuate the fiscal and structural economic pressures noted above. While the French government’s debt service costs have been largely contained to date, Moody’s would not expect this to remain the case in the event of a further shock. A rise in debt service costs would further increase the pressure on the finances of the French government, which, unlike other non-euro area sovereigns that carry similarly high ratings, does not have access to a national central bank that could assist with the financing of its debt in the event of a market disruption.

Over on Zerohedge they ask whether this is “The Beginning Of The Great French Unwind?” What they seem to be warning is that the country may well be in for a rather rough economic ride over the next two to three years.

In Germany meanwhile — where officials have been voicing increasing criticism of France’s sluggish progress in making structural reforms — Der Spiegel reported the downgrading with some concern: …”The move highlights concerns that France, rather than Spain or Italy, could be the true danger lurking in the heart of the euro zone. And worries that Hollande, who has shown only half-hearted interest in pursuing far-reaching economic reform, might not have the political backing necessary to modernize the country’s economy. Indeed, a poll released by the newspaper Le Journal du Dimanche on Sunday indicated that Hollande’s popularity has now decreased for six months in a row and stands at just 41 percent. In downgrading French debt, Moody’s highlighted a host of challenges facing the country’s economy, focusing specifically on what the agency called “multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets.”

Germany and France along with the Netherlands and a few smaller northern European economies are seen as key to ending Europe’s current sovereign debt crisis and the recession which some commentators are now calling a depression.

US economist Paul Krugman belittles the rating agencies

… and while on the matter of the ratings agencies and their downgrading of  sovereign debt, here are some recent scathing remarks by a UK-based economist Jonathan Portes, director of the National Institute of Economic and Social Research:

…”These agencies have repeatedly been proved wrong; they have flawed and frequently conflicted business models; and their ratings have no predictive power.  All this is well established. Moreover, when it comes to assessing sovereign debt “credit risk” they – and I mean this quite literally – do not know what they are talking about. By that, I mean they quite simply don’t understand what they themselves are saying.  See my blog here for an explanation…”

 

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