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The fallout from today’s ratings downgrades remains to be seen, with markets little moved.If anything, the move by Standard & Poor’s to cut France’s credit rating one-notch to AA+ brings a cacophonous chorus of market participants to a halt.
“It will be more political than economic,” Charles St.-Arnaud, Nomura’s international economist and FX strategist, says. “Now that France has lost its AAA status, it will give even more power to the German chancellor in negotiations.”
Mr. St.-Arnaud is not alone in seeing the impact of S&P’s decision as more than formality. In truth, the impact of S&P’s downgrade came after the ratings agency first announced it was placing France and 14 other Eurozone nations on negative credit watch.
Yields on the French 10-year hit nearly 3.400% on December 8, days after the Standard & Poor’s announcement. Since then, it has moved in a band between 2.928% and 3.402% and the country has not had difficulty raising capital.
But the loss of its cherished AAA rating may give German Chancellor Angela Merkel more room to dictate policy as the pair work on a plan for fiscal integration and solution for the region’s debt crisis. The news also puts work on the European Financial Stability Facility by the two policy leaders in question.
“A lot of it was anticipated, most of the time the ratings are lagging the data,” Mr. St.-Arnaud says. “The only thing is how much has it changed the rating of the EFSF. They did everything they could to ensure it would be AAA, but now that France is downgraded, and it was one of the largest contributors, that’s in question.”
If France’s AA+ triggers a downgrade of the EFSF, borrowing costs could be seriously impinged. That said, investors shrugged off S&P’s American downgrade just months ago.
“It’s a blow to politicians who over collateralized the fund to guarantee it would be AAA,” he notes.
French politicians have swiftly weighed in following the announcement. Jean-Marie Le Guen, a member of the National Assembly of France, called it a major setback for the Sarkozy administration on BFM-TV.
“This is first terrible news for France, our country will pay very heavily the consequences of this decision,” he said. “France is particularly targeted because it has increased its debt by a reckless fiscal laxity that we have repeatedly denounced.”
The threat of further cuts by Standard & Poor’s loom, and contributing to the lack of interest may have been the single notch decline France saw, unlike neighbouring nation Italy, which was cut to within three levels of junk-status.
“If you continue to see strain in Spain, or Italy or Portugal, you could easily see it,” Mr. St.-Arnaud said. “With growth slowing in 2012-13, it will be much harder for these countries to reduce their deficits.”