Egan Jones Downgrades France From AA- To A; Negative Watch, Sees Debt/GDP Rising From
Only the first of many French downgrades, this time by the rating agency which is always ahead of the pack. And like in Italy's case, EJ sees a soaring French debt/GDP, rising to 117% in 2013 from 91% currently.
Disastrous trend and the worst has yet to come. Over the past two fiscal years, the Republic of France's debt has grown by 21% from EUR1.32 trillion to EUR1.59 trillion. Meanwhile, FYE GDP declined slightly from EUR2.13 trillion as of 2008 to EUR1.93 trillion as of 2010. As a result, debt to GDP rose from 61.8% in 2008 to 82.5% in 2010 and is near 90% currently. As the EU growth slows, and France's unemployment rises, budget pressures will rise. An item which is hard to quantify but is a growing concern is the health of France's banks; the assets of the three largest banks equal 240% of France's GDP. Given France's propensity for supporting its banks, France might soon be confronting a substantial additional liability.
For the most part, over the past 18 months France has been exempted from the rise in funding costs. However, as the crisis evolves, we expect that France will be pressured. The deterioration in France's credit metrics combined with the needed supported for France's banks are likely to pressure the country. A major catalyst is likely to be the year end financials for France's banks; watch for a significant support program to be announced over the next couple of weeks.
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