France Likely to Lose Top Rating in Stressed Economic Scenario, S&P Says

France is among euro-region sovereigns likely to be downgraded in a stressed economic scenario, according to Standard & Poor’s.
The sovereign ratings of SpainItaly, Ireland and Portugal would also be reduced by another one or two levels in either of New York-based S&P’s two stress scenarios, the ratings firm said in a report dated today. These assume low economic growth and a double-diprecession in the first set of circumstances, and add an interest-rate shock to the recession in the second.
“Ballooning budget deficits and bank recapitalization costs would likely send government borrowings significantly higher under both scenarios,” S&P analysts led by Chief Credit Officer Blaise Ganguin in Paris wrote in the report. “Credit metrics would deteriorate sharply as a result.”
S&P is seeking to take account of the economic slowdown that hit Europe in the second quarter and which has led the ratings company to trim 2012 growth forecasts to an average of between 1 percent and 1.5 percent. France would follow the so- called peripheral euro-region nations that have already been downgraded, with Moody’s Investors Service saying earlier this week that its top rating was under threat.

Double Dip

A double-dip recession would result from falling industrial investment and declining consumer confidence in the first scenario, according to S&P. Under these circumstances, the Tier 1 ratios of 20 banks in S&P’s 47-strong sample may fall below 6 percent, forcing governments put in about 80 billion euros ($109 billion) of new capital to return them to at least 7 percent, according to S&P. A lender’s Tier 1 ratio is a gauge of its financial strength.
The yield premium investors demand to hold French government 10-year bonds rather than similar-maturity German debt has soared this month as concern mounts that contagion from the sovereign debt crisis has leeched into core Europe. The spread is at 119 basis points, from 71.5 basis points at the end of September. A basis point is 0.01 percentage point.
BNP Paribas SA was the biggest foreign bank holder of Greek bonds at the end of the second quarter, with about 3.8 billion euros of the securities, Bloomberg data show. Societe Generale SA, which had 1.9 billion euros of the debt, was the fifth- largest foreign holder.

Recapitalizing Banks