First Greece. Then Ireland. Next may be Portugal and Spain. Some are talking about Italy as well. As the sovereign debt crisis spreads through Europe, it is working its way up the food chain. Now, some are talking about Belgium and France too:
France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut.
Moody’s Investors Service said Dec. 15 it may lower Spain’s rating, citing “substantial funding requirements,” and slashed Ireland’s rating by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece. Costs to insure French government debt rose to a record today with the country’s credit default swaps more expensive than lower-rated securities from the Czech Republic and Chile.
Costs to insure French government debt trebled this year, reaching an all-time high of 105.5 today, according to data provider CMA. Credit default swaps tied to Czech securities were little changed at 90 basis points and Chilean swaps ended last week at 89.
The credit default swaps tied to the French bonds imply a rating of Baa1, seven steps below its actual top ranking of Aaa at Moody’s, according to the New York-based firm’s capital markets research group.
Contracts on Portugal imply a B2 rating, 10 levels below its A1 grade, while swaps tied to Spanish bonds trade at Ba3, 11 steps below its Aa1 ranking, data from the Moody’s research group show. Derivatives protecting Belgian debt imply a rating of Ba1, nine steps below its current rating of Aa1.
This is eerily familiar. The credit rating agencies gave overly optimistic ratings to collateralized mortgage obligations (portfolios of mortgages) and were then slow to downgrade them. Now, they are making the same mistake on an international level.
What do you think would happen if the credit rating agencies recognized reality and downgraded these countries to where the market believes they should be? The markets would crash. That’s why they are avoiding the painful truth.
However, the credit rating agencies and governments can only deny reality for so long. Eventually, they will have to recognize the truth. The market will force the credit rating agencies to downgrade sovereign debt whether they want to or not. The market will force countries to restructure their welfare state systems or force them into bankruptcy.
I pray that this is done sooner rather than later. It will be painful. Extremely painful. There will be riots in the street as we are already seeing. But it is better to bear the cost now when the situation is still manageable, just barely so, than when all chances of saving western civilization are gone and nations descend into anarchy and tyranny.
Michael E. Newton 
Gosh this stuff is depressing. No one likes bad news but you’re doing a service reporting it when it seems few others are.
You and Monty Pelerin’s World are always so full of cheer.
I don’t take enjoyment in reporting this. But it is better to recognize and address the problem now while we still can rather than wait until it is too late.
Nonsense, This is pathetic reporting from Bloomberg, only one quote even vaguely backs up their sensational headline. If there is such a big risk to French debt, then why are A- rated France Telecom 5-yr CDS priced 40 bps lower than the sovereign CDS? If there is such a big risk, then why hasn’t the 10-year French-German spread blown out rather than falling over the last three weeks. Perhaps France’s finances aren’t in great shape but they are in much better condition than the US and at least the government has clearly committed to a deficit reduction program that relies on good old fashioned budget discipline rather than debt monetization.
There can be a number of reasons for these discrepancies. (What are Germany’s CDS rates now?) If you think this story is incorrect, you can make a lot of money betting against it.
As for me, I believe that Moody’s, Bloomberg, and almost everybody else is assigning too low of a probability for France’s demise. On the surface, France may be fine, but what happens if Belgium or Spain defaults or needs a bail out. The risk is not of a singular event in France, but of a waterfall decline affecting all of Europe, which would spread to the US, Japan, and elsewhere. We are looking at a black swan type event, where traders assume something like this can never happen but then it does.
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