Last night France lost its triple A rating assigned to it by Moody’s the rating agency. Moody’s have moved French debt from the highest investment grade of Aaa to Aa1 which merely represents a “one notch downgrade.”
This has been rumoured for a while and there was even a leak at the start of the year that this was going to happen, with that in mind so far the markets have reacted quiet nonchalant and don’t seem that bothered. The single currency took a little knock on the actual announcement last night which was around 11pm but so far has regained its composure and acting as if nothing has happened.
All this really means is that bond investors who follow ratings due to corporate governance rules set out by their investment committee may have to trim back their investment in French debt. Its not a savage enough cut to spark a full scale sell off and I rather think they have pointed to the obvious. Any investor who was oblivious to the problems in France up to this date must have been hiding under a rock for the last few years.
Also do not forget that these rating agencies are the same organisations that in the past have given rubber stamps to toxic debt deals that led to the whole “credit crunch.” So perhaps they are becoming less effective and also overcompensating in a PR effort to show that they are indeed independent research providers.
It also has some funny timing in that the Economist led with a story last issue of France being a “time-bomb” and Nigel Farage a well known Euro sceptic that leads the UKIP had a piece in the FT over the weekend advocating Short French bonds long German bonds. I am not alleging any of these are in cahoots in any way but it does point to some serious “group-think.” When group-think occurs, i.e ideas become mainstream the markets have usually moved on from this already at least physcologically.
France do have a lot of problems the main one being an over exposed banking sector to troubled peripheral nations, they also have a president hell bent on punishing the successful by moving the top tax rate to 75%. I’m all for the top earners to pay more and contribute but 75% seems a little extreme and will only force the hand of the elite wealthy to move their money out of France and thereby potential to harm investment. I am sure Monsieur Hollande has a plan to combat this, he has had a stressful night I am sure but if he wakes up this am and sees that the world is still turning and no-one seems all that bothered of the downgrade then he can get to working on the country’s problems.