France’s AAA status could be downgraded in two years

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By:
Lianna Brinded
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Ratings agency Moody’s warns France of an official negative outlook, which could lead to a status downgrade

France’s AAA credit status is under threat, after Moody’s warned it may hit the country with a negative outlook if the money spent on bailing out eurozone members and its domestic banks impact too much on its budget.

If the ratings agency did deliver a negative outlook for France, it could lead to a downgrade in two years.

“The deterioration in debt metrics and potential for further contingent liabilities to emerge are exerting pressure on the stable outlook for the government’s AAA debt rating,” said Moody’s in a report.

The warning comes as no surprise to market participants, as the country and its banks are the largest holders of Greek debt, as well as having an ailing economy and government bond market.

Moody’s cut Société Générale and Credit Agricole’s credit ratings in mid-September, as concerns grew over French bank sovereign debt holdings and the level of state aid each bank holds.

Moody’s knocked Credit Agricole to Aa2 from Aa1 and cited its high level of Greek debt holdings as a factor. However, Moody’s says it will review the rating again at a later date. Meanwhile, Société Générale had its rating reduced from Aa2 to Aa3, with a negative outlook on account of the level of state support it receives.

Before the announcement, Euromoney learned from Frédéric Oudéa, CEO of Société Générale, that the group’s net banking book’s sovereign debt exposure to Ireland, Portugal, Greece, Italy and Spain combined was just at €4.3 billion on September 9, which amounts to less than 1% of the group’s balance sheet.

Despite the double downgrades in France, Moody’s left BNP Paribas’ long-term credit rating untouched at Aa2, although it did indicate that the Paris-based bank would be kept on review for a possible cut.

Shortly before Moody’s French bank rating report, BNP Paribas hit back at critics of its sovereign debt holdings and said its sovereign bond exposure to Italy is €21 billion, which is only “1.7% of BNP Paribas total commitments”.

Initially, media reports said that the bank’s eurozone government bonds banking book portfolio was €140 billion, but the bank said the total was €75 billion on June 30.

Meanwhile, on Tuesday, two more reports surfaced that suggested sovereign debt restructuring in other countries is more than plausible.