The 2012/11/23 at 10:00
In January this year, France saw its credit rating drop one level according to the results compiled by credit rating agency Standard and Poor’s, falling from AAA to AA+. On Monday this week, it was Moody’s turn to downgrade the country, now graded AA1 instead of AAA. The announcement is a new reminder to the government to bring about changes in how it manages its national debt. But the alarm bells sounded by these international credit arbiters seem to rouse increasing indifference from financial players. This trend is demonstrated by the value of the euro compared to the dollar, largely unaffected by the news. In the evening of Monday 19 November, following the announcement made by Moody’s, the single currency had certainly lost a bit of ground on the currency market. But on the morning of Tuesday 20 November, it strengthened again, going well over 1.28 dollars. The same could be observed on the CAC 40, whose slight shrinkage of 0.2 % in the early hours the day following the announcement was quickly considered as having nil effect by commentators. The index even finished the session on a 0.65 % rise. “To sum up the situation simply, we can say that following this downgrading, simply nothing happened,” remarks Xavier Timbeau, Economist and Director of the Forecast department at the OFCE (Department of Economics at Sciences Po).
The doling out of good and bad points by major American credit rating agencies is increasingly contested, as indicated by the reaction of the Bertelsmann Foundation which, on Tuesday 20 November, released the results of its research supporting a new rating model. The institute namely stresses the sound creditworthiness of France, which reaches almost the same level as Germany. Apart from traditional macroeconomic indicators, forecasting indicators developed in collaboration with rating experts are integrated in the analysis system of this non-profit international agency. They include, for example, State crisis management, investment in and usage of tomorrow’s energies, or the implementation of necessary structural reforms. The major asset of this type of rating would be to take into account a country’s socio-economic development, as well as traditional macroeconomic data, enabling better assessments to be obtained.
Unlike Moody’s, the Bertelsmann Foundation considers that the French government deserves a good grade for its crisis management. But it also puts forward a high risk of insolvency. Public debt has leapt from 66 % of the GDP in 2005 to 91 % today. Not only is it higher than in certain comparable countries, but it is expected to grow in the near future. The threats of higher interest rates in banks and State debt insurance companies are accused as responsible for preventing the country from getting out of the debt spiral. While the fears of various players are getting stronger, France’s currently relatively low interest rates may well rise. So what solutions should be envisaged?
French former Prime Minister Michel Rocard and economist Pierre Larrouturou are amongst the many figures defending an alternative inspired by the US Fed which, at the height of the 2008 crisis, saved the American bank system by granting 0.01 % loans. This would entail the European Central Bank (ECB) making loans to public establishments at similar rates to those granted to retail banks, that is around 1 %. These same establishments could then make loans to the States at the same rates and make the costs of refinancing former debt bearable. “A direct loan system is not on the agenda, but a solution similar to this is now envisaged with the OMT (Outright Monetary Transactions) system announced by the ECB and currently being set up,” explains Xavier Timbeau. But the contours of this new solution are yet to be defined. “This programme from the ECB will be offered to States on certain conditions. A public-finance adjustment plan respecting strict criteria will need to be proposed in exchange. Another big question that remains is the type of interest rate granted. No figure has been announced for the moment,” he continues.