France versus Britain

15th December 2011

Standard & Poor's said last week it may lower France by two levels in a downgrade. However, Noyer argues: "A downgrade doesn't strike me as justified based on economic fundamentals – or if it is, they should start by downgrading the U.K., which has a bigger deficit, as much debt, more inflation, weaker growth and where bank lending is collapsing."

But what do the experts say?

According to a variety of experts, this is more about mud-slinging than statistical fact. As FXStreet.com comments: "These comments show the level of animosity between both countries since the EU Summit."

A stronger rebuke comes from Zero Hedge blog, who adds: "…the Nash equilibrium in Europe is now fatally broken, because when you have the head of one central bank doing all he can to throw another central bank under the bus, that's pretty much game (theory) over…it  proves that this amateur has no more understanding of basic finance than your generic Reuters blogger…

"…So, please, spare us: let us at least assume you are a bunch of finance hacks who have no idea what is going on when it comes to corporate credit ratings and keep your mouth shut, than open it, and prove us right. That goes double for members of the ECB who are apparently so blinded with chauvinistic rage that they have forgotten the most elementary things about modern corporate finance. Or perhaps, far morely likely, they never really knew it…

"And lastly, if it is indeed Britain who ends up being downgraded, and suddenly every bond vigilante in the whole world comes sniffing and asking questions about those trillions and trillions of rehypothecated "assets" sloshing around within the terminally unregulated and abysmally lax framework of the isles, only to find just how shockingly deep the rabbit hole goes, who does France think will be nuked from financial orbit first?"

Shaun Richards, Mindful Money's economist blogger adds: "So much for the entente cordial – with friends like that eh? Of course the UK has plenty of problems but the Governor of the Banque de France has displayed the characteristics of a frightened and wounded animal here, which is to snap out at anyone nearby. Central banks do not usually attack nations which are, for example, in the European Union with them."

A question of French banks

It's ironic that Noyer would choose to comment on bank lending, given France's problems. Richards said on his blog last month: "France has a large banking sector… investors began to wonder if Societe Generale, Banque National de Paris and Credit Agricole might follow the route that Dexia had just been a pathfinder for. One worrying factor is that French banks have held substantial amounts of Greek government-bond's as well as  other weak Euro zone economies and this has weighed heavily on their shares since the sovereign-debt crisis deepened at the start of the summer."

Benedict Brogan adds in the Daily Telegraph: "Events have exposed a truth that many chose to ignore, namely that in its relentless pursuit of its national interest, France's strategic objective has been to drive the UK to the margins – if not out of the EU – and to destroy the City.

"The French narrative of the crisis is that it is all an Anglo-Saxon creation, and we must be punished for it. The failings of the euro so obvious to us are not recognised by the French.

"The British view is that packing the treaty proposals full of changes that Britain could never conceivably accept was a ploy to force us into a veto, and so into the departure lounge. "

Meanwhile, a Daily Telegraph blog adds: "Berlin and Paris may sneer, but they cannot escape the fact that the European Union is pushing the self-destruct button by opting for greater integration at a time when Europe desperately needs greater freedom to confront its biggest crisis since the Second World War. Angela Merkel and Nicolas Sarkozy are digging Europe's grave, as a continent suffocating under big government and over-regulation opts for more of the same."

But while banks continue to borrow using Britain's triple-A credit rating, would it really matter if we lost this anyway?

Sarkozy has been telling anyone who will listen that, should France lose its AAA rating, then it is not the end of the world. But would it matter for Britain?

The remaining AAA-rated countries are Austria, Australia, Canada, Denmark, Finland, France, Germany, Holland, Luxemberg, Norway, Singapore, Sweden, Switzerland and the UK. Break them down into currencies and you have the euro, Canadian dollar, Singaporean dollar, Swedish krona, Norwegian krone, Swiss franc and sterling.

The fact Britain has its own currency means we can borrow (self-finance) and instigate further bouts of quantitive easing, whether this is wise or not.  

Simon Ward, Henderson's chief economist and Mindful Money blogger, says: "Sovereign credit ratings are pretty meaningless – at least for countries borrowing in their own currency with their own central bank. Such countries will always print money rather than "default".

"The low level of gilt yields is not due to our triple ‘A&#39
; rating but instead reflects Bank of England intervention, forced buying by banks under regulatory pressure and capital flight from the euro area. The market, in other words, has been distorted and should not be viewed as having delivered as a vote of confidence in the coalition's fiscal plans.

"The rating process is farcical but there must be a good chance that one of the agencies will take the plunge and downgrade the UK next year. The impact would probably be minimal – as it was in the case of S&P's US downgrade this year."

More from Mindful Money:

Is Britain wealthier than Germany?

The Swiss Franc's strength remains a problem for the rest of Europe

The Eurozone veto could strengthen UK's emerging market trading

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