Full Text Of S&P Warning On FrAAAnce

Tyler Durden's picture

Standard & Poor's is placing its 'AAA' long-term unsolicited sovereign credit rating on the Republic of France on CreditWatch with negative implications. At the same time we are affirming France's 'A-1+' short-term unsolicited sovereign credit rating.

The CreditWatch placement is prompted by our concerns about the potential impact on France of what we view as deepening political, financial, and monetary problems within the European Economic and Monetary Union.

Our CreditWatch review will focus on the "political", "external", "fiscal", and "monetary" scores we have assigned to France in accordance with our criteria.

We expect to conclude our review as soon as possible after the European summit on Dec. 9, 2011.

FRANKFURT (Standard & Poor's) Dec. 5, 2011--Standard & Poor's Ratings Services today placed its 'AAA' long-term unsolicited sovereign credit ratings on the Republic of France on CreditWatch with negative implications. At the same time, we affirmed the 'A-1+' short-term unsolicited sovereign credit rating on France.

Our transfer and convertibility (T&C) assessment for France, as for all European Economic and Monetary Union (eurozone) members, is 'AAA', reflecting Standard & Poor's view that the likelihood of the European Central Bank (ECB) restricting nonsovereign access to foreign currency needed for debt service is extremely low. This reflects the full and open access to foreign currency that holders of euros enjoy and which we expect to remain the case in the future.


The CreditWatch placement is prompted by our concerns about the potential impact on France of what we view as deepening political, financial, and monetary problems within the eurozone. To the extent that these eurozone-wide issues permanently constrain the availability of credit to the economy, France's economic growth outlook--and therefore the prospects for a sustained reduction of its public debt ratio--could be affected. Further, it is our opinion that the lack of progress the European policymakers have made so far in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union. This, in turn, informs our view about the ability of European policymakers to take the proactive and resolute measures needed in times of financial stress. We are therefore reassessing the eurozone's record of debt-crisis management and its implications for our view on the effectiveness of policymaking in France.

Our CreditWatch review will focus on four areas of our criteria (see "Sovereign Government Rating Methodology and Assumptions," published June 30, 2011.)

  • The political score. In our view, the overall consistency, predictability, and effectiveness of policy coordination among institutions within the eurozone has weakened at a time of severe ongoing fiscal and economic challenges to a degree more than we envisioned. For France, we believe this environment could complicate the implementation of the government's fiscal consolidation strategy, possibly delaying the stabilization and reversal of the government debt trajectory. Specifically, we will review the policymaking environment in terms of: the predictability of its overall policy framework and its policy responses to current developments (see "Sovereign Government Rating Methodology and Assumptions," paragraph 40; all paragraph references herein are to this publication); and the effectiveness of policymaking in addressing periods of economic distress and correcting economic imbalances (paragraph 41).
  • The fiscal score. In our view, the budgetary measures announced by the French government to date may be insufficient to meet next year's budget deficit target of 4.5% of GDP, should France's underlying economic growth in 2012 fall below the government's current forecast of 1.0%. For 2012, Standard & Poor's projects real GDP growth of 0.5% and a budget deficit of 4.8% of GDP. Moreover, in our opinion, there are non-negligible downside risks to the government's real GDP forecast of 2% during 2013-2016, which we believe would require additional deficit-reducing measures to fully meet its medium-term budgetary targets. At the same time, we believe the French government has shown its commitment to taking additional budgetary measures--should this be necessary--to fully comply with its medium-term budgetary strategy.
  • The external score. French financial institutions and companies are currently experiencing rising borrowing costs on their debt, which implies more-complicated access to financing. We estimate French banks' external debt at about 104% of GDP in 2011, of which about 60% is short term, implying sizable external refinancing needs for the French banking sector in 2012, in our opinion. This implies considerable external refinancing needs for the French banking sector during 2012 in our view--though we take note of the headway many larger French commercial banks are making in scaling back medium- and long-term refinancing needs by shedding external assets. Liquidity concerns and the weakening asset quality of French banks' securities and loan portfolios could, in our view, increase the risk of the need for additional capital injections by the state or similar interventions. In our view, this raises the possibility that contingent liabilities could materialize. In addition, we will review the risk of a sudden reduction of cross-border interbank lines resulting from perceptions of increasing financial-sector stress (paragraph 76). We will also review France's fiscal capacity (at its current rating level) to provide additional support to its national banking system should further official assistance be required.
  • The monetary score. We will review the ECB's policy settings and their impact on financial market conditions, the real economy, and ultimately France's creditworthiness (paragraphs 107, 117, and 118). If we were to conclude that the ECB's policy stance is unlikely to be effective in mitigating the economic and financial shocks that we believe France could be experiencing, we could lower this score.


We expect to conclude our review as soon as possible after the European summit on Dec. 9, 2011.

If we change one or more scores, we could lower the long-term rating by up to two notches. Conversely, if the above concerns were mitigated by what we consider to be appropriate policy action, we could affirm the long-term rating at 'AAA'.

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nope-1004's picture

No more Vive a la bullshitting?


He_Who Carried The Sun's picture

Yawn! S&P, you hear me?   Y*A*W*N !

ratso's picture

Classic overreach by S&P after having been asleep at the switch for years.


Hard1's picture

And after being asleep for years they place the LONG TERM ratings of over indebted countries on CreditWatch, but with the condition that a short term policy response can still change S&P's opinion  (I cannot think of any politically viable apropriate policy response that may change my view on Europe's debt)  Anyway the market knows best. Just as a sample:

France AAA      5 yr CDS 179

Brasil  BBB+     5yr CDS 147


He_Who Carried The Sun's picture

The funney thing is, if they do Eurobonds they WILL BE downgraded and if they DO NOT Eurobonds they will be downgraded as well?! I opt for the second outcome... ;-)

blu's picture

Shorter S&P: Sorry chumps but people are watching now. Get your act together or we throw you under the bus as an example to the others.

slaughterer's picture

Europe-wide fiscal integration and treaty changes are not going to solve the problems S&P points out here.   The EuroConTricks will no longer delay the inevitable downgrade after Dec 8-9.  Ugly weekend to remain long coming up.   

distopiandreamboy's picture

ECB should hold rates steady and then rise from the swath of downgrades with the hum of Brent crude-oiled printing presses.

spdrdr's picture

La France est dans la merde.

John Law Lives's picture

I will believe there is a global recovery in place when EU member states and the US and Japan and China etc. collectively announce the steady and sustainable creation of millions of good paying new jobs whilst collecting healthy tax revenue streams whilst managing deficit spending in a prudent fashion.  Until then, this talk of "recovery" based upon Merkel + Sarkozy meetings is pure BS.

LeBalance's picture

S&P: "We certainly mean business about this MF Global co-mingling affair. Yes we have a big stick and we are going to use it. Sometime. We ... will ... act.  When we act.  Shortly.  After the summit.  Did we say the 8th and 9th? Shortly.  Next time it happens we will be there to enforce the rules, next time you can mark our words.  Mark them, I say."

S&P: "Mommy? Can I have a popsicle with my hookers and blow?"

Ancona's picture

Tomorrows action should be fun to watch in Europe. Almost as fun as it is to watch the manipulations in our own markets.

Village Smithy's picture

Can you imagine the string of profanities coming from Sarkozy's mouth right now. "Deux notches!" @@$*^%$?*#**&%%##.

PulauHantu29's picture

Belligerent Sarkozy is too busy invading Libya and fighting for the Next Nobel Peace Prize to be bothered with trivial things like the French people.

Grand Supercycle's picture

SP500 monthly chart remains bearish and USDX weekly remains bullish, so it’s only a matter of time until the market makes its move.