There\’s a bit of horse and cart here.
France could be stripped of its triple-A credit rating before Christmas, raising new doubts about the survival of the euro, analysts have predicted.
Analysts said that if France\’s rating was slashed its borrowing costs would rise, making it more expensive for Paris to refinance its debt burden in the new year.
Well, sorta but not really.
France has to pay more to borrow relative to fellow triple-A rated Germany: when France borrows over 10 years it pays an interest rate that is at least a percentage point higher than what Berlin pays.
You see, France is already trading at not AAA sorts of prices.
It\’s all rather chicken and egg as to whether a change in the rating is what moves prices and yields or movements in prices and yields that are recognised by changes in ratings.
Think of it this way: everyone who buys, or if they\’ve already bought decides on whether to hold or sell, French debt is asking themselves, well, are they going to repay? And what does everyone else think about it too?
S&P is asking exactly the same set of questions. It\’s just the buyers and sellers buy and sell moving the price, S&P issues a report about it.
Given that France is already trading at non-AAA prices it\’s difficult to say that the upcoming report is what changes them. Although ,to be fair, given that markets are forward looking, that the report might recommend a downgrade could have an effect.
However, as always, it\’s not quite that simple. For a loss of the AAA means banks holding French debt now have to assign capital to that holding (currently, I think I\’m still right in saying, AAA sovereigns need no capital allocation).
And the decision is made on two out of the three (S&P, Moodys, Fitch).
A downgrade would also hit France\’s ability to contribute to the European financial stability facility, set up by members of the eurozone to combat the eurozone\’s sovereign debt crisis, and provide emergency funding.
That\’s definitely true, although the EFSF is already trading at worse rates than the underlying guarantees indicate it \”should\”, meaning that the markets think it a failure already.