Full Text Of S&P Warning On FrAAAnce

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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.

RATIONALE

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.

CREDITWATCH

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'.