Game Theory Over: Bank Of France's Noyer Says Britain Should Be Downgraded, Not France

Tyler Durden's picture

To anyone who doubted that the gloves are now fully off between France and Britain, we bring you exhibit A: Speaking in an interview with local newspaper Le Telegramme de Brest to be published later on Thursday, Bank of France head and ECB member Christian Noyer said that a downgrade of France's AAA credit rating would not be justified and ratings agencies are making decisions based more on politics than economics and questioned whether the use of ratings agencies to guide investors was still valid. "In the arguments they (ratings agencies) present, there are more political arguments than economic ones," said Noyer, the head of the Bank of France and a member of the ECB's governing council. "The downgrade does not appear to me to be justified when considering economic fundamentals," Noyer said. "Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping." The bolded sentence confirms two things: i) that the Nash equilibrium in Europe is now fatally broken, because when you have the head of one central bank doing all he can to throw another central bank under the bus, that's pretty much game (theory) over; and ii) when he said that "the agencies have become incomprehensible and irrational. They threaten even when states have taken strong and positive decisions. One could think that the use of agencies to guide investors is no longer valid." it proves that this amateur has no more understanding of basic finance than your generic Reuters blogger, both of whom apparently fail to comprehend that there are several hundred thousand bond and loan indentures in the real world, not the world of "S&P has no credibility so ignore it", which are loaded with covenants discussing springing liens, rating indexed interest levels and collateral thresholds, all of which are based on a sovereign and corporate rating, and all come into play in a completely unpredictable way (hint AIG - the reason why AIG imploded was because a rating agency downgrade unleashed a terminal margin call) when there is a rating downgrade. Such as that of France in a few hours to days top.

So, please, spare us: let us at least assume you are a bunch of finance hacks who have no idea what is going on when it comes to corporate credit ratings and keep your mouth shut, than open it, and prove us right. That goes double for members of the ECB who are apparently so blinded with chauvinistic rage that they have forgotten the most elementary things about modern corporate finance. Or perhaps, far morely likely, they never really knew it...

Which, incidentally, explains why we are all about to enter the latest and greatest global cataclysm (to borrow a word from Alain Juppe).

And lastly, if it is indeed Britain who ends up being downgraded, and suddenly every bond vigilante in the whole world comes sniffing and asking questions about those trillions and trillions of rehypothecated "assets" sloshing around within the terminally unregulated and abysmally lax framework of the isles, only to find just how shockingly deep the rabbit hole goes, who does France think will be nuked from financial orbit first?