PARIS—French Foreign Minister Alain Juppé said Wednesday that a credit-ratings downgrade wouldn't be "cataclysmic," further fueling market expectations that the government is preparing for an imminent loss of its cherished triple-A ranking.
"It wouldn't be good news, of course, but it would not be cataclysmic either," Mr. Juppé said in an interview with French newspaper Les Echos that was conducted Tuesday.
A French official said the government hasn't been informed of a looming ratings downgrade by S&P. The official said that the intentions of S&P regarding France's credit rating are unknown to the government at this stage. He that there was no reason that investors would doubt France's ability to service its debt.
S&P typically gives a government 12 hours notice ahead of a change in its ratings.
An S&P spokesman said the agency does "not comment on market rumor or speculation about our ratings."
Still, coming after French President Nicolas Sarkozy said on Monday that a ratings downgrade would be "an added difficulty, but not insurmountable," Mr. Juppé's remarks only further convinced investors that the government expects S&P to cut France.
"You have a bunch of senior officials talking as if it's a done deal," said Steven Englander, head of G10 strategy at Citigroup in New York. He said it's not just a possible French downgrade, but other triple-A countries as well, such as Austria. "It looks like they're using expectations management."
Mr. Englander said growing anticipation that France or other triple-A-rated European countries will be downgraded has been a major factor exerting pressure on the euro.
The common currency continued its slide Wednesday, falling to a fresh 11-month low of $1.2945 during late morning trading in New York, according to EBS via CQG, before recovering modestly. The euro traded at $1.3038 late Tuesday.
A further drop in the euro could come at the end of the week if a downgrade hasn't occurred by then, Mr. Englander said. That's because investors won't want to be exposed to further risk in the event of downgrade being announced after markets close on Friday.
S&P put France and most other countries in the euro zone on review for a downgrade on Dec. 5, pending the results of the European Union summit at the end of last week.
France is seen at greater risk, as S&P warned it could lower the country's rating by two notches from triple-A, while the five other triple-A ratings in the euro zone were only threatened with a one-notch downgrade.
S&P said at the time it would make a decision on the ratings quickly after the EU summit based on whether euro-zone countries managed to deliver a common solution to the crisis and limit the impact on their individual economies and creditworthiness.
Moody's Investors Service has already indicated it was unimpressed with the outcome of the summit. As the euro-zone continues to battle the crisis only with "incremental measures," the risk of multiple defaults by its members will become greater, it said.
Investors have speculated for months that France, which has the highest deficit as a percentage of gross domestic product of all of the triple-A rated euro-zone countries, was at risk of losing the top ranking.
Mr. Sarkozy's government has already unveiled two austerity packages in three months as it races to reassure investors that it can rein in its deficit against a backdrop of stalling growth.
And the widening of France's borrowing costs against Germany in recent months suggested investors have already anticipated France's rating falling below the euro zone's safe haven.
The S&P warning on France "only confirms the expectations of investors that have already priced in a large part of France losing its triple-A," said IG Markets analyst Jérome Vinerier.
Bond investors had been pushing France's borrowing costs higher, with the difference between French and German 10-year yields hitting a euro-era high of more than 2 percentage points last month.
But the gap has since narrowed and French bonds actually rallied Wednesday, which some traders attributed to thin year-end market conditions.
One trader said the current gap between French and German 10-year bond yields of 1.25 percentage point "does not reflect the real risk of a ratings downgrade," adding that he expected the gap to widen to about 1.7 percentage point if France sees a two-notch downgrade.
Any downgrade of France or its euro-zone peers would have a ripple effect on the region's bailout fund, the European Financial Stability Facility. Its own triple-A rating, which stems from the guarantees of its triple-A graded members, is also on review.
S&P said last Tuesday it could downgrade the EFSF by up to two notches, in line with the outcome of its review on the relevant sovereign nations.
wsj.com
"It wouldn't be good news, of course, but it would not be cataclysmic either," Mr. Juppé said in an interview with French newspaper Les Echos that was conducted Tuesday.
A French official said the government hasn't been informed of a looming ratings downgrade by S&P. The official said that the intentions of S&P regarding France's credit rating are unknown to the government at this stage. He that there was no reason that investors would doubt France's ability to service its debt.
S&P typically gives a government 12 hours notice ahead of a change in its ratings.
An S&P spokesman said the agency does "not comment on market rumor or speculation about our ratings."
Still, coming after French President Nicolas Sarkozy said on Monday that a ratings downgrade would be "an added difficulty, but not insurmountable," Mr. Juppé's remarks only further convinced investors that the government expects S&P to cut France.
"You have a bunch of senior officials talking as if it's a done deal," said Steven Englander, head of G10 strategy at Citigroup in New York. He said it's not just a possible French downgrade, but other triple-A countries as well, such as Austria. "It looks like they're using expectations management."
Mr. Englander said growing anticipation that France or other triple-A-rated European countries will be downgraded has been a major factor exerting pressure on the euro.
The common currency continued its slide Wednesday, falling to a fresh 11-month low of $1.2945 during late morning trading in New York, according to EBS via CQG, before recovering modestly. The euro traded at $1.3038 late Tuesday.
A further drop in the euro could come at the end of the week if a downgrade hasn't occurred by then, Mr. Englander said. That's because investors won't want to be exposed to further risk in the event of downgrade being announced after markets close on Friday.
S&P put France and most other countries in the euro zone on review for a downgrade on Dec. 5, pending the results of the European Union summit at the end of last week.
France is seen at greater risk, as S&P warned it could lower the country's rating by two notches from triple-A, while the five other triple-A ratings in the euro zone were only threatened with a one-notch downgrade.
S&P said at the time it would make a decision on the ratings quickly after the EU summit based on whether euro-zone countries managed to deliver a common solution to the crisis and limit the impact on their individual economies and creditworthiness.
Moody's Investors Service has already indicated it was unimpressed with the outcome of the summit. As the euro-zone continues to battle the crisis only with "incremental measures," the risk of multiple defaults by its members will become greater, it said.
Investors have speculated for months that France, which has the highest deficit as a percentage of gross domestic product of all of the triple-A rated euro-zone countries, was at risk of losing the top ranking.
Mr. Sarkozy's government has already unveiled two austerity packages in three months as it races to reassure investors that it can rein in its deficit against a backdrop of stalling growth.
And the widening of France's borrowing costs against Germany in recent months suggested investors have already anticipated France's rating falling below the euro zone's safe haven.
The S&P warning on France "only confirms the expectations of investors that have already priced in a large part of France losing its triple-A," said IG Markets analyst Jérome Vinerier.
Bond investors had been pushing France's borrowing costs higher, with the difference between French and German 10-year yields hitting a euro-era high of more than 2 percentage points last month.
But the gap has since narrowed and French bonds actually rallied Wednesday, which some traders attributed to thin year-end market conditions.
One trader said the current gap between French and German 10-year bond yields of 1.25 percentage point "does not reflect the real risk of a ratings downgrade," adding that he expected the gap to widen to about 1.7 percentage point if France sees a two-notch downgrade.
Any downgrade of France or its euro-zone peers would have a ripple effect on the region's bailout fund, the European Financial Stability Facility. Its own triple-A rating, which stems from the guarantees of its triple-A graded members, is also on review.
S&P said last Tuesday it could downgrade the EFSF by up to two notches, in line with the outcome of its review on the relevant sovereign nations.
wsj.com
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