The French on a Credit Downgrade Threat: Pick on Britain

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Nelson Almeida / AFP / Getty Images

French Prime Minister Francois Fillon speaks during a meeting with Brazilian businessman at Sao Paulo's State Industry Federation (FIESP) headquarters in Sao Paulo, Brazil, on December 15, 2011.

Tis the season—for painful downgrades by credit agencies that is, as Thursday’s move by Fitch targeting six of the world’s largest banks again shows. And indeed, because such action is now so common, the big question looming in Europe’s grinding debt crisis isn’t whether France and its fellow euro-zone partners will lose their AAA credit ratings–or see their already lowered bond grades demoted further still. Instead, the main question is how long Standard & Poor’s will wait before ratcheting down ratings. Ever since S&P’s Dec. 6 announcement that it was putting the European Union’s finances and 15 of the 17 euro-zone economies—including Germany–on negative watch pending review,  governments have been whistling in the graveyard and declaring that those expected downgrades will be no big thing.

“What’s important isn’t the judgment of a single day, but (longer) trajectory of structured policy and budgetary rigor,” said French Prime Minister François Fillon during a trip in Brazil Thursday, referring to the austerity measures France and its euro partners have all agreed to—and in many cases applied—without convincing agencies or markets such moves represent the “structured policy” capable of tackling the debit crisis. That echoed the even more dismissive reaction of German Chancellor Angela Merkel after S&P issued negative alert, when she sniffed, “What a rating agency does is the responsibility of the rating agency”.

Perhaps, but such comments mark a dramatic change of tune from the ditty European leaders sang while applying austerity programs and rushing out bail-out funds designed to appease S&P’s concerns over sovereign debt. And no nation has been more vocal in modifying that melody than France, where advisers to President Nicolas Sarkozy had until very recently been calling the triple-A rating “a national treasure” in French efforts to escape a downgrade, and avoid potentially fatal increases in borrowing costs. Indeed, Sarkozy himself considered preservation of France’s AAA rating so crucial to French finances—and in validating the austerity responses he and Fillon unveiled to avoid downgrade—that he was recently quoted describing his re-election hopes with the simple but dramatic formula, “if we lose our triple-A, I’m dead”.

He is now defying death. Sarkozy and members of his cabinet now tell anyone who will listen that while they aren’t keen to lose the nation’s top-notch rating, France’s isn’t going to jump out any windows if it does. A rating cut, Sarkozy told Le Monde Dec. 12, “would be one more difficulty, but would not be not insurmountable” (thereby putting a rather can-do spin on the notion of “dead”).

“It wouldn’t be good news, of course, but it also wouldn’t be cataclysmic,” French Foreign Affairs Minister Alain Juppé similarly told the economic daily Les Echos Wednesday referring to downgrade.

The goal of the new “what, me worry?” French mantra? To convince markets they already know France’s rating is going to be cut—and perhaps by as much as two grades; that they’re fine with that; and they’ll therefore have no negative reaction when that inevitability becomes official with S&P’s announcement. It appears you just have to remind those absent-minded markets about everything.

“The information about the lowering of the French note is already known, has already been digested by markets, and moreover concerns the entire euro zone, not just France,” reminded Economy and Finance Minister François Baroin this week.

Perhaps, but France has already seen its short-term borrowing rates rise significantly in recent weeks before the downgrade became a virtual given. To be sure, the interest investors demanded on new 10 year French bonds were still nowhere near the dangerously high levels of nearly 7% Italy and Spain have flirted with. Still, they were considered alarmingly lofty for a country viewed as one of Europe’s (relatively) healthier economies, and which hasn’t been dragged into the main mosh pit of default risk that Greece, Portugal, Spain, and even Italy have. Plus, some experts feel that even if Baroin may be right in assuming markets have ingested a French downgrade as unavoidable, investors still may shrink back in horror if it comes amid cuts affecting an entire array of E.U. nations—including some outside the euro-zone.

What’s more, leaders themselves are starting to add to the willies agencies and investors are getting from the crisis by showing their willingness to play politics—and break out battling each other—when unity is to confront the common emergency. With tempers still hot following the UK’s rejection the E.U. debt-fighting pact most other European partners embraced last week, some French officials now seem to actually argue that ratings agencies rooted in the City of London will be undermining their own credibility and trustworthiness if they don’t begin Europe’s downgrade spree with Britain.

“Our British friends have a higher deficit and more debt, and I would say that the ratings agencies have not yet noted that,” argued Fillon Thursday in Brazil, after conceding the euro-zone is not exempt from reproach for the crisis it created for itself “because we’re very indebted.”

Not to be outdone, Bank of France governor Christian Noyer also struck out at ratings agencies that he said have become “incomprehensible and irrational”, and “launch threats, even though (euro) countries have taken strong and positive decisions” to overcome the debt crisis. Then he, too, seemed to seek breathing room for euro countries by arguing that, if any nation is flattened by the hard-charging downgrade bus, Britain should be the first thrown beneath its wheels.

“A downgrade doesn’t seem justified to me when you look at the economic fundamentals–or else a downgrade should come first for the U.K., which has a greater deficit, as much debt, more inflation, and less growth than us, and collapsing credit,” Noyer told the regional French daily le Telegramme in an interview Thursday. “I don’t know what the agencies are doing. As I see it, what they have succeeded in doing with their critical commentaries is undermining the positive feelings that markets had following the summit in Brussels.”

That kind of verbal chest jabbing of ratings agencies won’t be inclined to head off the downgrades French officials now obviously seem to expect. But at least it will allow them to claim to French voters they got a few solid shots in before France’s “national treasure” triple-A took its first steps toward junk status.