France rebounds following bond sale and Moody’s boost

Markets lifted as it became clear S&P’s downgrade of France’s credit rating did not surprise investors, is not in line with Moody’s view and had little impact on the rates of French government bonds.

At its first government bond sale since S&P cut France’s credit rating by one notch on Friday January 13, the French treasury successfully sold a total €8.59bn in bills. These were sold at lower rates than at a similar auction held one week earlier when France still had its AAA rating.

Following the bond sale the CAC 40 was up 0.312% at €3,206.75, the Stoxx 50 up 0.30% at 2,344.92 and the FTSE 100 up 0.22% at 5,649.04.

Meanwhile rival agency to S&P, Moody’s, announced it would not cut France’s credit rating, maintaining it at AAA with outlook stable. The third major credit rating agency Fitch had already said it would not downgrade France this year.

According to Morten Spenner (pictured), chief executive of fund of hedge funds International Asset Manager (IAM), the fact that markets have barely reacted to the S&P downgrading spree shows they are “calmer” than in 2011 and the effect of the downgrades had “already been priced in to markets”.

“Markets are starting the day in negative territory and then slowly climbing up throughout the day. This is very unusual,” he added.

In this environment investors who have been “waiting for three years” for the financial climate to improve may now start “taking more drastic action” and placing money in new products as they have become used to the volatility, Spenner said.

According to Bernard Angeniol, financial risk manager at French group Ecofi Investissements, “France losing its AAA rating had been expected for several months, as demonstrated by the spread between German and French government bonds exceeding 1% some time ago.”

“With this in mind the rating agencies have been following markets, not anticipating them. The real question was whether France would be downgraded by one or two notches. Last November markets were anticipating France to be downgraded by two notches causing its government bonds to be sold at higher rates than they were today,” Angeniol added.

Moody’s said the French government’s AAA rating reflects “the French economy’s strength, the robustness of its institutions and very high government financial strength.”

“France’s sustainable GDP growth has been supported by the economy’s large size, high productivity, broad diversification and its track record for innovation together with high private sector savings and an only moderate built-up of household and corporate liabilities.”

“As demonstrated by the resilience of domestic demand during the global crisis, these features provide ample capacity to absorb shocks,” Moody’s argued.

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