Sunday, November 13, 2011

France outraged over 'shocking' debt downgrade mistake

PARIS - France reacted with outrage after the Standard & Poor's ratings agency accidentally sent out a message saying it was downgrading the country's prized "AAA" credit rating.

During a tumultuous week in Europe's protracted debt crisis, the error stood for an hour and a half Thursday before it was retracted by the agency -- spooking markets by foreshadowing an event that could sound the death knell for the 17-nation eurozone.

The accident came just as Greece and Italy both were selecting interim governments led by financial experts to guide them out of the continent's debt crisis. Most European markets were still open at the time, and U.S. financial markets were in full swing.

Some of the fallout from S&P's error could not be undone despite the rating agency's statement saying the original message had gone out to some subscribers because of a technical error and its reaffirmation that France's credit rating remained "AAA" -- the highest level -- and stable.

The yield, or interest rate that France pays to borrow money for 10 years, has risen 0.32 percentage points since Thursday morning, hitting 3.48% Friday, the highest rate since May.

In the midst of a crisis in which fear-driven rumors drive the markets as much as confirmed fact, the error also reminded investors that France does have some financial difficulties. And in volatile markets, the suggestion of something amiss is nearly as bad as having something amiss.

French Finance Minister Francois Baroin did his best to quell fears, calling the error a "rather shocking rumor of information that has no foundation."

"We won't let any negative message go," he said in Lyon in comments published Friday on the La Tribune newspaper website.

The French market regulator immediately opened an investigation into the mistake at Baroin's behest, and the minister also called for a European probe.

The error may have increased the pressure on French bond yields, but they were already rising -- because, like many countries, France is struggling with slow growth and high debt piled up during its boom years.

The rise of government-issued bond yields is at the heart of Europe's debt crisis: The increase of those interest rates in Ireland, Portugal and Greece -- because investors considered them increasingly bad risks -- eventually forced each of those countries to seek massive international bailouts.

Now Italy is coming under the same pressure. That poses a bigger problem because its economy and debts dwarf the others -- Italy's economic output is 17% of the eurozone compared to a combined 6% for the other three nations. Europe actually doesn't have enough money to fully bail Italy out.

But a French debt downgrade would be a problem in an even more important way. France and Germany's "AAA" credit ratings are the bedrock of Europe's bailout fund. Because the debt of those two countries is considered so safe, the fund pays very favorable interest rates on its bonds.

Some analysts said the accident may have tipped the actual thinking at the ratings agency.

"I can't remember a situation where an agency released a rating movement in error and no doubt there will be many people who believe that there is no smoke without fire and that this cannot have happened unless S&P were preparing the ground for a downgrade," Gary Jenkins, an analyst with Evolution Securities, said Friday.

He hastened to add: "I have no idea if this is the case or if it was just a genuine error."

S&P, however, does not even have France on surveillance -- the step that typically comes before a rating is downgraded. Moody's, on the other hand, says it is studying whether to put France's rating on notice.

A downgrade of French debt would also pose a domestic problem for that nation. President Nicolas Sarkozy, who is expected to face a reelection battle next spring, has staked his credibility on balancing France's budget by 2016.

Along the way, Sarkozy has laid out yearly targets for reducing France's deficit -- each one tied to a growth projection. But those forecasts have repeatedly proven too rosy and his conservative government has already twice this year been forced to introduce extra cuts to stay on target.

It's clear the last thing Sarkozy wants to see is for French borrowing costs to rise as his government fights to reduce its deficits and keep the eurozone united.

On Thursday, the European Commission said it considered France's growth forecast for 2013 too high -- and Baroin quickly responded that Paris has already set aside a reserve fund for that eventuality.

by Sarah Dilorenzo Associated Press Nov. 11, 2011 09:25 AM

France outraged over 'shocking' debt downgrade mistake

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