PREVIOUSLY: Fitch is adding fuel to the firestorm of debate surrounding France’s AAA credit rating.
This morning, the ratings agency released a note saying that France’s hold on the agency’s top rating is already shaky at best, but it stands to lose the agency’s top marks if economic conditions in the eurozone deteriorate any further.
That follows a hints last month and earlier this week from Moody’s that France could soon be put on downgrade review.
That said, today’s Fitch report explains that French situation is still stable at present, given assumptions that France will not have to contribute the entirety of the sum it has planned to contribute to the European Financial Stability Facility and that it won’t have to recapitalize its banking system. It begs the question—what exactly is Fitch banking on?
From the press release:
Similar to the situation of other major ‘AAA’ sovereigns, the increase in government debt has largely exhausted the fiscal space to absorb further adverse shocks without undermining their ‘AAA’ status. The principal concern with respect to France is that the intensification of the eurozone crisis will generate contingent liabilities that will be crystallized onto the sovereign balance sheet.
Today’s report suggests that were France’s EUR158.5bn guarantee commitment to the EFSF (‘AAA’) to be fully utilized – not Fitch’s current base-case scenario – gross government debt would surpass 95% of GDP, placing it at the higher end of the range that Fitch judges would be consistent with France retaining its ‘AAA’ status. This would leave the sovereign balance sheet with little room to absorb further shocks, such as having to fund capital injections into domestic banks, unless there were significant off-setting measures that would quickly reduce public debt to levels consistent with its ‘AAA’ rating. Fitch does not currently expect the French banks to require or to receive capital injections from the state at this juncture.
Under a stress scenario whereby a further intensification of the eurozone crisis resulted in a much sharper economic downturn in France and across the region, and a material increase in the risk of contingent liabilities being crystallised, especially with respect to financial support for the banking sector, France’s ‘AAA’ rating would be at risk.
UPDATE: S&P’s head of sovereign ratings, David Beers, is jumping on the bandwagon of fear-fueling this morning.
“The financial dynamics unleashed by the ongoing confidence crisis, in Standard & Poor’s view, have heightened the risk of renewed recession in a growing number of euro zone members that potentially could put additional downward pressure on (the) euro area’s sovereign ratings,” he said (via Reuters). He added that Germany’s perceptions of what to do about the crisis could change now that it’s beginning to see rising borrowing costs like the rest of the eurozone.
France is at the centre of this debate over a possible downgrade, as Europe’s ability to stem the crisis would be materially damaged if it no longer held AAA status.
Whatever Fitch’s predictions, this report has lead to a hike in French bond yields this morning. Check out the 10-year, now over 3.70%: