French fears

Pummelled

Markets go into a panic about France

Aug 13th 2011 | PARIS | from the print edition

The Economist

NICOLAS SARKOZY, France’s president, rushed back from his holiday on August 10th to defend the country from financial attack. In a day of rumour, panic and denials, shares in Société Générale, the country’s third-biggest bank, fell by almost a fifth before recovering some ground to close down 15%.

The immediate cause for worry was a question-mark over whether France will keep its triple-A rating after Standard & Poor’s cut America’s on August 5th. France’s debt stood at 82% of GDP last year, from 64% in 2007. This is one of the highest of any AAA-rated country. That, investors fear, means it could be the next target for a downgrade, especially if already anaemic economic growth falters further. The extra yield required by investors to hold French debt instead of German Bunds jumped to almost triple the average level of 2010 while the cost of insuring against a default by France reached new highs during the week.

After an emergency meeting of ministers, Mr Sarkozy pledged to fulfil recent promises on debt reduction, regardless of whether economic growth slows. More reassuringly, Moody’s, S&P and Fitch, the three major credit-rating agencies, all said France’s rating was stable.

As Société Générale’s shares tumbled, the cost of insuring its debt against default soared by 55 basis points, suggesting it will face a significant increase in borrowing costs. Shares of other French banks were also hit. Those in BNP Paribas, the euro zone’s biggest bank, fell by 9.5%; Crédit Agricole’s fell by 12%.

“French banks have a bit of everything—exposure to Greece and to Italy—and investors are extremely worried about their funding costs,” says one analyst. Some investors feared that Mr Sarkozy’s meeting was held to address a sudden crisis at Société Générale. The Elysée palace denied that any bank had been present at the meeting and Société Générale denied “all market rumours”.

The ultimate fear is that if France’s rating was cut then the European Financial Stability Facility would struggle to issue much triple-A-rated debt. That would leave it unable to borrow cheaply enough (or in sufficient amounts) to support those euro-zone countries that have lost access to bond markets. The euro’s new lines of defence run not through Italy and Spain, but France.