Citi Has First Reaction To Moody's Downgrade: Not Surprising But More EURUSD Downside

Tyler Durden's picture

From Citi's Steven Englander:

Moody's downgrades France to Aa1 from Aaa -- negative outlook

Moody’s cited  deteriorating economic prospects, loss of competitiveness, structural issues and uncertain resilience to negative shocks. They also cite France’s funding costs (even though borrowing rates are close to record lows.)  On the negative outlook, Moody’s says “Moody's would downgrade France's government debt rating further in the event of additional material deterioration in the country's economic prospects or difficulties in implementing reform. Substantial economic and financial shocks stemming from the euro area debt crisis would also exert further downward pressure on France's rating.”  The comments are fairly general, as with the US downgrade last year. If anything the emphasis on the deteriorating growth picture may add some pressure for the ECB to ease but with france 2yr yields at 11bps, its growth prospects would probably benefit more from an easing of sovereign concerns in the peripherals than from a cut in ECB policy rates.

Moody’s alsdo reminds that “Moody's currently also holds negative outlooks on those Aaa-rated euro area sovereigns whose balance sheets are expected to bear the main financial burden of support via the operations of the EFSF, the ESM and the ECB. Apart from France, these countries comprise Germany, the Netherlands and Austria."  So the French downgrade may presage others to come

As with the US downgrade last year, little of what they cite is new and the downgrade reflects a reality that has probably long applied to France and applies to a number of the remaining Aaa countries as well. At today’s 90, France’s CDS was trading a little higher than  Poland and Estonia and a little below Qatar, Abu Dhabi and Belgium. The 10yr spread versus Germany is in the range of the last three months, and close to where it was in August 2011 before Spain became a major issue.

With EUR now at 1.2773 versus 1.2816 just before the announcement there is probably more downside till the kneejerk reaction is out of the way. But on the whole it seems likely that this more reflects an already existing reality than new information for the market so the downside should be relatively limited, and nothing that could not be cured by an aggressive Fed indication on balance sheet expansion.

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fonzannoon's picture

"But on the whole it seems likely that this more reflects an already existing reality"

France at investment grade is not reality. Fail.

EnslavethechildrenforBen's picture



There was never any upside to counterfeit paper of undefined value at unpayable interest

dexter bland's picture

French 10 year currently yielding just 2.07%, the bond market might have a stronger reaction to this than the US downgrade. Unlike USTs there is an easy choice for most institutions to not hold French debt.

Interesting that Moody's highlighted the lack of an independent central bank as a factor in the decision. Are they suggesting France may be better off out of the Eurozone? That seems to be the case for most of its members.

Fíréan's picture

" With EUR now at 1.2773 versus 1.2816 just before the announcement  . . . "


The author fails to mention that the EUR RALLiED from 1.2765 at 13.00 hrs same day ( 19nov.) to 1.2816  also prior to the announcment. So the dip is only back to where it was earleir same day prior to the announcment.

Give the whole picture, why not ?

Rainman's picture

Relax...Bernank won't let anything fail before the Blackest of Fridays. Get out there and buy an emergency generator.

mewenz's picture

"...nothing that could not be cured by an aggressive Fed indication on balance sheet expansion."  Has this country ever been less subject to any semblence of honest market forces?  Is there an endpoint?  Do policy makers believe that this is truly in the best interest of the country as a whole?  A European country is given a ratings downgrade and it is actually at the point now that the accepted response is that the U.S. Central Bank should print more money "to cover it".  What economic theory or historical precedence is this based on?

slaughterer's picture

"What economic theory or historical precedence is this based on?"  MMT: or, Bernanke's "spread the love" of the "global reserve currency"

Jam Akin's picture

No worries, it will get worse for sure before it gets better.

VonManstein's picture

this is a dollar salvage mission. scrapin the barrel now

PUD's picture

Unreal that any intelligent rational sane man would fluff it all off because trillions in $$$ from thin air stand at the ready

stormsailor's picture

its just digits in a widget

Josephine29's picture

There is also to consider the weak state of many of the French banks. As the article I quote from below points out it is a long time since the French President blamed Anglo-Saxon banks for everything!

"What about the French banks?

When the credit crunch began we saw an extraordinary amount of hubris from the then French President Nicholas Sarkozy. He blamed Anglo-Saxon banking for the credit crunch.

Even our Anglo-Saxon friends are now convinced that we must have reasonable rules

This had the implication that the banks of La Republique had avoided such behaviour. Unfortunately for France they have not. Several of them decided that Greece was the place to expand in at on the newswires today are the results of one of these expansion plans. From Bloomberg.

Credit Agricole, led by Chief Executive Officer Jean-Paul Chifflet, agreed last month to sell its Emporiki Bank unit to Greece’s Alpha Bank under terms cutting the French lender’s net income by 1.96 billion euros. The company is ending a six-year investment in Europe’s most indebted country as concerns linger Greece might exit the euro area.

Credit Agricole has declared a 2.85 billion Euro loss for the last quarter which apparently in the way of modern-day accounting means that if you exclude all the losses it may have a profit! So she is further weakened ahead of a likely French economic slowdown"

And of course there is Dexia....

magpie's picture

Where are the CDS rates, Lebowski

davidsmith's picture

$40 trillion of Fed balance sheet expansion to go.

hmmtellmemore's picture

At least Japan has a printing press.  Kyle Bass should be focusing on France first, that is a big juicy target.

Mr Lennon Hendrix's picture

Americans are the fucktards of Fucktardakistan.  Europeans may be fucktards as well, but everyone hates Americans.  Africa hates Americans because we don't know the difference between a tribal leader and a tribal warlord, South Americans hate us because we cut down their rainforest for hamburgers and spill oil all over everything, and Middle Easterners hate us because we bomb their infrastructure in the name of peace.  Asia has been laughing all the way to the bank as the West gets put on the financial ropes or else they would hate us too.

Europeans may be fucktards but at least they are connected to land by the largest producers of energy.  Americans think because shale and tar sands are now "abundant" there will be a resource boom, but Americans have lacked math skills (let along critical thinking skills) for some time now and have never studied EROEI.  They fail to understand that the cost is higher for tar sands and shale and that oil needs to be higher than $100/barrel for them to make sense producing.  This means higher energy costs. And higher energy costs means lower GDP.

Americans are King of Fucktard Mountain, and they will remain atop the mountain until it explodes, which it looks close to doing.

Fidel Sarcastro's picture

Well, this fucktard is LMFAO!  +1000

Rip van Wrinkle's picture

But can't only AAA rated sovereigns participate in the ESM?? So, by looks like Finland might be bailing out Spain, Greece (again), Portugal and Ireland...oh. and Cyprus.


And Malta


And Slovenia


And France

Banksters's picture

Subprime is contained - Dr. Bernanke

Banksters's picture



I remember when the govt gave them a 300 billion dollar bailout. Friends helping friends...