Report could lead to France's downgrade
France on Tuesday slumped to 13th place in a eurozone league table of financial security, adding to fears that the second-largest economy in the 17-member currency club could lose its top-notch credit status in the next few months.
Analysts said the overall health of the French economy ranked only one place above Italy and below several countries often mentioned as being near to bankruptcy, including Spain and Ireland.
The report by the Lisbon Council, a Brussels-based think-tank, came as fund managers warned that confidence was quickly evaporating in France’s ability to deal with growing government debts and potential bad loans held by its banks.
Mike Riddell, a fund manager at M&G Investments, one of the United Kingdom’s largest bond investors, said France was experiencing “a full-blown run on its debt” after the yields on 10-year government bonds soared to 3.69%, the highest since the formation of the euro 12 years ago. The cost of insuring investments in the French debt market also jumped to its highest level since 1999.
Riddell said Paris was considered to be closer to Rome than Berlin in terms of dealing with escalating debts and troubled banks, whereas Stuart Thomson, chief economist at Ignis, a Glasgow-based fund manager, said France was almost certain to lose its AAA credit rating.
A lending spree to peripheral eurozone countries, including Italy and Spain and many of the emerging market economies in eastern Europe, has undermined the stability of French banks, he said. In the event of a bailout, the French taxpayer would need to find billions of euros to prevent them from going bankrupt.
The French finance minister, Francois Baroin, rejected pleas from Brussels last week to make steeper cuts in government spending. He said a series of austerity measures already in the pipeline would be sufficient to reduce spending and bring France’s annual deficit to within manageable limits.
France announced a €19-billion package of cuts this month that took the total package of tax rises and cost savings to about €65-billion over five years.
But the French finance ministry has remained silent on the impact of investments by the country’s banks in Italy, Spain and other indebted nations.
French banks are believed to hold the highest amount of Italian debt of any eurozone country. Large-scale loans in parts of eastern Europe could turn sour after a slowdown in growth in Europe that is forcing some firms into bankruptcy.
An indicator of the dangers was provided by Italian bank Unicredit in its annual results earlier this week, when it wrote off €9.6-billion and ring-fenced more than €40-billion in its accounts, much of it loans in eastern Europe. Banks are not obliged to provide details of their lending and governments have resisted publishing a breakdown of loans made to different countries or banks.
About two-thirds of all lending in the eurozone is between its 7 000 banks and institutions in the United States, Asia and the Middle East. Eurozone banks hold about €55-trillion in assets, much of them loans to sovereign countries or other banks.
The Lisbon Council’s “Euro Plus Monitor” report said: “Alarm bells should be ringing for France. Among the six eurozone countries with a AAA rating, France achieves by far the lowest ranking in the overall health check. The results are too mediocre for a country that wants to safeguard its place in the top league.”—