Moody's Warns France, CDS Hits New High, Fitch Warns U.S. 'Super Committee'

Credit rating agencies released updates on France and the United States recently. Fitch said, if the U.S. 'Super Committee' fails to reach an agreement on deficit reduction measures, it would "most likely" result in a "revision of the rating outlook to Negative."
"Fitch Ratings-London/New York-21 November 2011: In Fitch's August 16 statement, when it affirmed the US 'AAA' sovereign ratings with a Stable Outlook, the agency commented that it would update its US economic and fiscal projections in light of the work of the 'Super Committee'. Fitch also commented that failure by the Super Committee to reach agreement would likely result in a negative rating action -- most likely a revision of the rating Outlook to Negative, which would indicate a greater than 50% chance of a downgrade over a two-year horizon. Less likely would be a one-notch downgrade.

The announcement today that the Super Committee was unable to reach agreement on at least USD1.2 trillion of deficit-reduction measures underscores the challenge of securing the political consensus on how to reduce the federal budget deficit and place US public finances on a sustainable path over the medium-term. Fitch now expects to conclude its review of the US sovereign rating by the end of November." (Source: Fitch)

However, since no agreement would still force $1.2 trillion in automatic cuts, both Moody's and S&P said it wouldn't affect the U.S.'s credit rating. But if the deficit reduction plan happens to change, that could be the catalyst for more downgrades (read more at Bloomberg). Mark Zandi, chief economist at Moody's, believes "2012 is shaping up to be a very, very tough year. And in large part it's because the Super Committee decided to punt" (Fox Business). More on this in another post. The "payroll tax holiday" expires at the end of the year and emergency unemployment insurance expires on 1/3/2012.

French 5Y CDS (Bloomberg)
Now onto Europe. Moody's, in their 11/21/2011 Weekly Credit Outlook, said that higher borrowing costs, slower economic growth (government estimates 1% GDP), fiscal austerity measures and contagion from the euro zone debt crisis, would have "negative credit implications". Oh, and the French 5Y CDS (credit default swap) hit a new high of 229 basis points yesterday. It is insurance on French debt priced in spread (bps).

Here's a quote from Alexander Kockerbeck, Vice President - Senior Credit Officer at Moody's, in the report.
"Last week, the difference in yield between French and German 10-year government bonds breached 200 basis points (bp), a euro-era record amid increased economic and financial market uncertainty in the region. Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications"

"As we noted in recent publications, the deterioration in debt metrics and the potential for further liabilities to emerge are exerting pressure on France’s creditworthiness and the stable outlook (though not at this stage the level) of the government’s Aaa debt rating."

Related posts:

10Y French-German Yield Spread Hits 20-Year High On Moody's Review, EFSF Guarantee (Chart) 10/29/2011

CLSA's Chris Wood: Risk of "Euro Quake" During Crisis, Watch French-German Yield Spread 11/13/2011

10-Year French-German Spread +11% at 1.83, Belgium-German Spread +9.28% at 3.07 11/15/2011

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