France\’s AAA rating

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.

Well, OK.

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.

22 comments on “France\’s AAA rating

  1. This really does seem to be reaching the “hang the bastards” stage, doesn’t it? I remember Tim did a post some time ago about some admiral who was excuted in the 18th century, and how that was a handy way to keep admirals in general on the straight and narrow.

    The evidence from the last couple of centuries, particularly the last one, is that the toxic cartel of bankers and government never learn their lesson. Every time they ruin the rest of us, give it another generation and they’ve forgotten what happened and do it again because This Time The Boom Will Last Forever.

    So it seems to me that grabbing a few prominent bankers, wheeling them through the streets on rickety carts, then cutting their heads off, that might actually be a bit more of a lesson.

    Well clearly, we’re going to have to do something. We can’t carry on like this, can we?

  2. @Ian B: you seem to be making the case that bankers + pols are like the Bourbons. Can we be civilised, please, and spare their wives and bairns?

  3. Well, I dunno, it’s hard to decide. The lesson from history seems to be that it’s better to kill too many and be remembered as a monster, than to kill too few and be remembered as a failure.

  4. And the lesson from the farce of John Byng’s trial and execution is that honourable and capable public servants regularly face disgrace for the incompetence and expediency of politicians.

    To the perpetual Disgrace
    of PUBLICK JUSTICE
    The Honble. JOHN BYNG Esqr
    Admiral of the Blue
    Fell a MARTYR to
    POLITICAL PERSECUTION
    March 14th in the year 1757 when
    BRAVERY and LOYALTY
    were Insufficient Securities
    For the Life and Honour
    of a NAVAL OFFICER

  5. @3 Or we could be a whole less civilised & much more practical & use the families as hostages to success. “2 1/2% growth p/a or the rug rat gets it.”

    As by & large politics seems to have become a hereditary career (Kinnock, Mandelslime, Benn etc) we could actually get some evolutionary mileage out of this. Cull the bad genes & we could breed towards honest, competent politicians. Televised, the gelding of the failures could rival Strictly Come dancing for Saturday night entertainment.

  6. In Econoland, markets perfectly discount the future.
    in Realand they discount facts more than rumour.
    There are plenty of funds (widows, orphans, pensions) which rarely trade and are obliged to keep X% in AAA bonds. So just like tracker funds they react only after the fact.

    That said, France is so fucked by its greedy unions and fonctionnaires, not to mention its ludicrous business practices (restaurants closing for staff mealtimes, etc) that recovery is easy to imagine and could be quite swift.
    OK, never happen. They’re French.

  7. Well, France is an excellent example of a Revolution that went wrong because they didn’t kill enough people. At the end of it, there were still some Frenchmen left.

  8. Getting a bit off topic, but N A M Rodger is as usual interesting on the Byng case. Byng was doomed by the Articles of War themselves: even with political protection, which he did have, it was impossible to save him against public anger. It’s worth reading Rodger directly, but thanks to Google, I find I needn’t elaborate on the case myself;:Massie has a good summary in the Spectator http://goo.gl/oj2Lc

    Perhaps there are more similarities between Byng’s case and the bankers after all: the latter have been vilified to the public, which has taken it up enthusiastically, but is it right to do so?

  9. the latter have been vilified to the public, which has taken it up enthusiastically, but is it right to do so?

    Yes it is, because it is actually their error.

    Perhaps one way to look at it is this; the economy has become over the past couple centuries entirely dependent on banking. This did not need to happen; it was a very deliberate choice by bankers and politicians working together. Whatever, that is where we are.

    This means that the banking industry can, by acting unwisely, bring the entire economy down, in a way that no other industry can. They have been given a monopoly on the money supply. Without them, there literally is no money. Which is in anybody’s book pretty catastrophic.

    So, knowing this, the bankers should, if they had any decency, which they do not have, recognise that their institutional role is one of grave and solemn responsibility. This should, if they had any decency, which they do not have, lead them to always act with caution, always aware that a wrong step will ruin not just themselves, but everybody.

    But they do not, because they do not have any decency.

    Rather, they have the awareness that because of their pivotal position, the State will have to step in and save them if they piss away everybody else’s wealth on ludicrously unsustainable get-rich-quick schemes, which is what they do.

    If the banking industry, gravely and solemnly, had made an error, that would be understandable. But instead, the banking industry pissed everything away on a profit party they hoped would never end. And then, when the party ended, they demanded more money, and the ruin of all of their fellow citizens, to spend on another party. Right now, they are gambling on whether the peoples of various European nations have any capacity left to give them even more money, and have said peoples scrambling to maintain their AAA bitch rating.

    Villification is the least they deserve. There is a serious ethical case- no joking- for tumbrels and wicker baskets.

  10. Ian B – “This really does seem to be reaching the “hang the bastards” stage, doesn’t it?”

    Speaking personally, that is always my “Go to” default state. I mean, really, when have they ever not been hangable?

    “The evidence from the last couple of centuries, particularly the last one, is that the toxic cartel of bankers and government never learn their lesson. Every time they ruin the rest of us, give it another generation and they’ve forgotten what happened and do it again because This Time The Boom Will Last Forever.”

    Ruin the rest of us? As I look out over a nation of obese non-workers I have to say that the idea Britain has been economically ruined is not the first thing that occurs to me. In fact I would say that Capitalism and those nice bankers are doing a pretty good job. It is true that France is in deep trouble about now but that is because too many people weren’t listening to the bankers and were pursuing an absurd political, not economic, dream. We ought to hang them.

    3dearieme – “Can we be civilised, please, and spare their wives and bairns?”

    Nope. As the Kinnocks prove, the Godfather was right – it is all of them or their children will grow up and have their revenge.

  11. Ian B – “Perhaps one way to look at it is this; the economy has become over the past couple centuries entirely dependent on banking. This did not need to happen; it was a very deliberate choice by bankers and politicians working together. Whatever, that is where we are.”

    Sorry but I have a large sum of cash. Where do you suggest I put it except in a bank? Lend it to a guy down the pub? As it happens in the modern world I do have a variety of non-bank alternatives. As I do if I want to borrow money. Not all involving large tattoo’ed men with broken noses. We are almost uniquely not reliant on banks these days. But what do you propose as an alternative? Sharia?

    “This means that the banking industry can, by acting unwisely, bring the entire economy down, in a way that no other industry can.”

    I don’t know. I think with a bit of effort other industries can too. God knows coffee used to do it for Brazil. Banks are interconnected though. This is a good thing. Usually.

    “They have been given a monopoly on the money supply. Without them, there literally is no money. Which is in anybody’s book pretty catastrophic.”

    Sorry but why do you believe that? One of the largest de facto currencies in the world right now is Frequent Flier Miles. You don’t see a lot of banks involved in that. Why do you think that banks are necessary for currency to exist? Nor do they have a monopoly depending on how you define money.

    “So, knowing this, the bankers should, if they had any decency, which they do not have, recognise that their institutional role is one of grave and solemn responsibility. This should, if they had any decency, which they do not have, lead them to always act with caution, always aware that a wrong step will ruin not just themselves, but everybody.”

    And notice that the only institutions that went down in Britain – before Brown meddled anyway – were the former Building Societies. All the older banks, at least those sensible enough to ignore Brown, survived. They did take their responsibilities seriously.

    “Rather, they have the awareness that because of their pivotal position, the State will have to step in and save them if they piss away everybody else’s wealth on ludicrously unsustainable get-rich-quick schemes, which is what they do.”

    Well obviously if the Government is going to back every bet I make on the ponies I am going to make more bets on the ponies. That is not the banks’ fault is it?

  12. “As I look out over a nation of obese non-workers “

    Wow. Is that really your perception? We’re all fat, and nobody works? Crikey.

    In fact I would say that Capitalism and those nice bankers are doing a pretty good job.

    Yes, fabulous job. That’s why the papers have been full of nothing but the collapsing banking “industry” and the State propping it up for the past three years.

    How much money are they talking about now to keep the Eurozone banking “industry” in hookers and cocaine? How many zillions is it now?

    You see, this is this whole problem where States have formed this unholy alliance with the banks, and if one goes down so does the other. Nobody is actually trying to save the economy. Nobody gives a shit about the economy. They don’t even know what the economy is. They think it’s the banks.

    So all they actually can do is keep coming up with ever more ruinous crazy schemes for saving the banks. But the fact is, the banks are dead. They have been dead for three years. It’s already over. They’re Hitler ordering new offensives against the Red Army from his bunker, with imaginary troops.

    The banking system we have had, in which credit is recycled via government borrowing to create more M0, thus magically producing ever greater quantities of ever more worthless credit, has finally hit the buffers. It is what always happens with expansionary fiat. I don’t know why people can’t grasp this. You end up with a thermal runaway, where you can’t generate enough new money to keep the system going without doing a Zimbabwe. That is where we are right now. No old money to keep it going left, and too risky to create any more new money. So, they mither around, and don’t do anything. Because nothing can be done.

    It’s over. It really is all over.

    It’s a pretty remarkable definition of “a pretty good job”, that.

  13. SMFS, you seem to be having some trouble with reality regarding currency.

    Firstly, just a general reminder, the banking system in Britain is nationalised (BoE) and in America de facto nationalised (Fed) and so on elsewhere.

    Secondly, it is a matter of law that nobody is allowed to create money except the central banks. That is just a fact. You can create pseudo-money if you’re careful (pretend stuff like the Brixton Pound) but legal tender is entirely a State monopoly, granted to the BoE.

    (And in the States, you can’t even do pseudo-money, as operators of various “gold currencies” have discovered when the Feds kicked their doors down and stole all the gold).

    I think this is the problem here. Many people seem to be under this daft illusion that banking is a private industry.

    Anyway, the key point here is that once the gold standard was entirely done away with, the “commodity” backing the currency is a magic thing called M0. M0 lives only in the hive mind of the Bank Of England. And that is why it is quite proper to say that the money itself is owned by that State-backed banking industry, rather than would be the case in a private sector banking industry, which would just handle commodity money (e.g. gold, grain, cowrie shells, whatever). That’s the difference.

    Under free banking, if all the banks collapse the gold (cowrie shells etc) still exists. Under State banking, the M0 disappears up its own arsehole and there is literally no money at all (other than a smattering of note and coin that happens to be outside the banks on Collapse Day).

  14. Ian B – “Wow. Is that really your perception? We’re all fat, and nobody works? Crikey.”

    Depends where you are I suppose, but pretty much. That Britain is able to support huge numbers of obese non-workers is a measure of how successful Capitalism is. It is not as if you see these people in India or China.

    Yes, fabulous job. That’s why the papers have been full of nothing but the collapsing banking “industry” and the State propping it up for the past three years.

    Due for the most part to government meddling not the banks themselves. But even if the banks were responsible, 130 years since the last banking collapse has meant massive increases in living standards. For everyone. Three bad years in exchange for the 20th century is not a bad deal.

    “How much money are they talking about now to keep the Eurozone banking “industry” in hookers and cocaine? How many zillions is it now?”

    TARP turned a profit in the US. If the British government finds a modicum of competence the same might be true of the UK. However much it is, it will not only be vastly smaller than the rest of the economy, it will even be smaller than the billions we piss away every year on the idle obese.

    “You see, this is this whole problem where States have formed this unholy alliance with the banks, and if one goes down so does the other. Nobody is actually trying to save the economy. Nobody gives a shit about the economy. They don’t even know what the economy is. They think it’s the banks.”

    Sorry but this is nuts. If the banks collapse, the State and the economy will still be there. Even if we have a 1929 style disaster – and I don’t rule it out – we are talking about being richer than we were in the 1970s. I remember the 1970s. Apart from flares and the discovery of herpes, they weren’t too bad.

    It is what always happens with expansionary fiat. I don’t know why people can’t grasp this.

    Because it is not true?

  15. Ian B – “SMFS, you seem to be having some trouble with reality regarding currency.”

    Obviously. In what sense are Frequently Flier Miles not currency?

    “Secondly, it is a matter of law that nobody is allowed to create money except the central banks. That is just a fact. You can create pseudo-money if you’re careful (pretend stuff like the Brixton Pound) but legal tender is entirely a State monopoly, granted to the BoE.”

    That depends on what you mean by currency doesn’t it? I have a Starbucks debit card. Yes, I am ashamed but it is true. How is that not currency? I can buy things with it. It is widely accepted. I have all of five pounds on it.

    “M0 lives only in the hive mind of the Bank Of England.”

    I am not exactly convinced of that. There is such a thing as M0 which is separate from the Bank of England.

    “Under free banking, if all the banks collapse the gold (cowrie shells etc) still exists. Under State banking, the M0 disappears up its own arsehole and there is literally no money at all (other than a smattering of note and coin that happens to be outside the banks on Collapse Day).”

    Like any other IOU in fact. But what is the value of a cowrie shell if the economy goes south? I wonder. Yes, we have a fiat currency and you’re speaking to someone who is willing to consider the alternative. But so what?

  16. SMFS, this argument about frequent flyer miles and your Starbucks card is pretty fatuous. They are not the currency. The currency is the pound. Your Starbucks card’s balance is measured in pounds. That is what the currency is.

    Which is why nobody is saying “who cares ab0ut the Euro, people have got frequent flyer miles and Starbucks cards”.

    Your argument is basically vexatious.

  17. Also, this-

    But what is the value of a cowrie shell if the economy goes south?

    It has a value of one cowrie shell. That’s the difference between a commodity and fiat that I was trying to illustrate. A fiat simply ceases to exist. It has no intrinsic value. A heap of cowrie shells continues to be worth one heap of cowrie shells, regardless of the existence of a central bank and legal tender laws.

  18. If frequent flyer miles are a good example of a private-sector currency we’re best off with the BoE/Fed/ECB.

  19. Ian B – “SMFS, this argument about frequent flyer miles and your Starbucks card is pretty fatuous. They are not the currency. The currency is the pound. Your Starbucks card’s balance is measured in pounds. That is what the currency is.”

    Why aren’t they currency? I can buy an air ticket with pounds, Euros or my frequent flier points. Why are the first two currencies but not the last? I can get a cup of coffee with my card. How is that not currency?

    “Which is why nobody is saying “who cares ab0ut the Euro, people have got frequent flyer miles and Starbucks cards”.”

    Well Frequent Flier Miles are, I dimly remember, the second biggest currency in the world after the American dollar. But they are hard to transfer. However if the euro collapses people may want that Starbucks card. Even if it is denominated in pounds.

    “Your argument is basically vexatious.”

    It isn’t. I give Starbucks £5. I now have £5 less in paper money but I have a card I can use to buy coffee. Starbucks is up £5 until I buy that coffee – and the money supply has expanded by £5. How is it vexatious to point that out?

    19Ian B – “It has a value of one cowrie shell. That’s the difference between a commodity and fiat that I was trying to illustrate. A fiat simply ceases to exist. It has no intrinsic value. A heap of cowrie shells continues to be worth one heap of cowrie shells, regardless of the existence of a central bank and legal tender laws.”

    Except that kind of misses the point. The cowrie shell has a use-value. People didn’t accumulate them because they looked pretty. They did so because other people swapped them for things like water buffalo. If everyone agreed to stop using them as currency they would only have whatever value being pretty gave them. So your definition misses the point – what is their value in pigs if their use as currency collapses?

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