With the sense of economic crisis deepening in Europe after the United States debt downgrade, investors have played who’s next with the shrinking list of nations that still hold the top rating of AAA. And their sights have landed on France.
Shares of French financial institutions have been hammered on the Paris stock exchange on mounting fears that France’s own sterling credit rating could be cut, if the cost of cleaning up the European debt crisis weighs on the nation and its banks.
French banks are loaded up on the debt of Italy and Greece, among other troubled European countries that share the euro.
It seemed not to matter that the French government — along with the credit raters Standard & Poor’s (S&P), Moody’s and Fitch — have issued statements insisting France’s rating was not at risk. But the market anxieties spread wildly with BNP Paribas and Société Générale shares slumping.
President Nicolas Sarkozy interrupted his vacation on the French Riviera to return to Paris for an emergency meeting with finance officials to discuss “the economic and financial situation” of France, whose government debt and budget deficit make it look the weakest of any big AAA-rated nation. Sarkozy gave his ministers a deadline to prepare measures to ensure that France meets its deficit reduction targets, which it had trouble doing in the past. Analysts say France also needs to stoke growth and cut its high sovereign debt, which S&P cited in its note accompanying the American downgrade on Friday.
That note projected that France’s debt in the year 2015 would be 83 per cent of its gross domestic product — even higher than the 79 per cent S&P forecast for the United States by that year.
S&P also indicated that it expected France and other AAA-rated nations to have their debts and deficits more under control than the United States by then.
“There has been a lot of market noise about France, rather than ratings agency noise,” said Gary Jenkins, a strategist at Evolution Securities.
“On the other hand, there was market noise about the PIGS and the United States before they were downgraded,” he noted, using an acronym for the European countries swept up in the debt crisis — Portugal, Ireland, Greece and Spain.
The annual cost to insure $10 million in French government debt against default jumped to a record $175,000 on Wednesday, up from only $100,000 three weeks ago. The cost also hit records for Société Générale and BNP Paribas.
French banks are among the most exposed to Greek, Spanish and Italian debt, and they also hold huge amounts of French sovereign debt.
Société Générale, a globally interconnected bank that the French government regards as too big to fail, moved closer to the eye of the storm recently. It has significant exposure to Greece through a retail subsidiary there, and it holds vast sums of troubled debt from small and large European economies.
David Thébault, head of quantitative sales trading at Global Equities in Paris, noted that many European insurance companies, as well as banks, were scrambling after S&P downgraded the United States to AA+ from AAA. Many of those companies and banks need to replace their United States Treasury securities because they are required to hold only top-rated sovereign debt.
“Volatility is very high — we’re in quasi-crisis mode,” he said.
Société Générale issued a lengthy statement after the close of trading, saying it “categorically and vigorously” denied all the “completely unfounded” market rumors that affected its share price. The bank, which reported a euro 1.6-billion ($2.28 billion) first-quarter profit last week, said it had asked the French stock market regulator to investigate the source of the rumors.
The big fear in the markets, though, is the threat of contagion — whatever the reason for the tumult.
“We’ve been really cautious, and the sovereign crisis is now escalating,” said Philip Finch, global bank strategist for UBS. “It boils down to a crisis of confidence. We haven’t seen policymakers come out with a plan that is viewed as comprehensive, coordinated and credible.”
Despite France’s undisputed influence as Europe’s biggest power broker next to Germany, its debt as a percentage of gross domestic product is expected to reach 85.3 per cent this year, according to the International Monetary Fund (IMF). That would be the highest among any European country in the AAA club.
France’s budget deficit, meanwhile, will fall to 5.7 per cent of GDP this year, the IMF said, still well above the 2.3 per cent forecast for Germany, and the second-highest after Britain among the AAA-rated countries in Europe.
And despite an array of world-class companies like LVMH Moët Hennessey Louis Vuitton, L’Oréal, Renault and Danone, France’s economy is gripped by labour market rules and other factors that keep it from growing faster.
The economy is expected to grow only two per cent this year and next, slower than the 3.4 per cent pace of Germany. Unemployment is around nine per cent.
©2011 The New York Times News Service
