France does not deserve AAA rating, says Carmignac Gestion

France might lose its AAA rating and the heads of the European Union lack leadership, Eric Le Coz (pictured), deputy managing director of French group Carmignac, has declared.

In a recently published statement Le Coz said a rating downgrade seems “inevitable” for France. 

This is because its debt stands at 85% of GDP, 70% of its debt is held by international investors and the country is racking up substantial fiscal and trade deficits.

Although France “does not appear to deserve its AAA status” as things stand, a rating downgrade would be a blow to the Eurozone, he added. 

Despite confirming France’s AAA rating earlier this week, Moody’s said this would be monitored over the next three months to assess its government’s progress in implementing economic and fiscal reform measures.

More austerity in France would mean even weaker growth, which would hit Germany as France is its number one trade partner, Le Coz argued. He said this made another recession increasingly likely.

“Short-term support for European growth can now only feasibly come from the European Central Bank. Are Mr Trichet or his successor prepared to abandon their instinctive orthodoxy?” he questioned.

Le Coz also lamented the lack of bold political decisions throughout September when markets underwent another month of severe volatility.

“The battle is currently raging to establish whether it will be Barroso or Von Rompuy who will steer the European Union out of the crisis; we just want to know if anyone is actually behind the wheel,” he said.

Le Coz has a firm view of what a strong European leader should do to improve matters. The ECB should cut interest rates, openly implement quantitative easing and adopt policies to deliberately weaken the euro in order to boost the zone’s export potential, he said.

“Without such measures, collapse becomes a near certainty. Now is not the time to be hiding behind the sole mandate of price stability,” he noted.

According to Le Coz, the EU cannot count on the US to help stimulate growth and banking on growth in the emerging markets is risky as their growth rates are slowing down.

In this climate Carmignac’s fund managers are once again taking a defensive approach to protect investments rather than generate returns.

The equity exposure of Carmignac’s various funds has been reduced for most of the period and its global funds’ equity exposure has been close to the legal minimum.

The modified durations of bond portfolios have been kept high with a focus on US and German government bonds. This has served the funds well and the Carmignac Global Bond fund returned 2.97% in September.

At a currency level, exposure to the euro was low throughout the period in preparation for what Carmignac believed would be an inevitable depreciation.

“Emerging economies happy to reduce their pace of growth, a drained US economy temporarily out of ammunition, a European economy swaying on its foundations” have rendered short-term risks extremely unattractive, Le Coz said.

However, there was a spark of optimism at the end of his statement. He argued that a recession, unlike France losing its AAA rating, “is not inevitable”, that emerging countries’ central banks will or have already put an end to monetary tightening and that western central banks be forced to reflate.

When these trends gain pace Le Coz believes Carmignac will being exposing its portfolios to growth themes which will probably stem from the emerging world.

Carmignac’s managers are not afraid of taking a bold stance on monetary policy in the EU or criticizing European leaders.

In early October Edouard Carmignac, the company’s founder, attacked the economic policy decisions of outgoing president of the European Central Bank, Jean Claude Trichet, in a series of full page advertisements published in the Financial Times, Le Figaro, Le Monde and El Paìs.


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