French bank head says UK should be downgraded first

THE GOVERNOR of France’s central bank has said Britain is more deserving of losing its top-notch credit rating than France as Paris braces for a potential downgrade of the country’s triple A status.

Christian Noyer, head of the Bank of France, said a French downgrade would not be justified on economic fundamentals. On that basis, he said: “They should begin by downgrading the United Kingdom which has bigger deficits, more debt, higher inflation, less growth than us and where credit is shrinking.”

Accusing the agencies of being driven by political factors, Mr Noyer told Le Télégrammenewspaper in Brittany they had become "incomprehensible and irrational".

“They launch threats, even though [euro zone] states have taken strong and positive decisions ... a downgrade does not seem to me justified based on economic fundamentals.”

François Fillon, the prime minister, added to rising expectations of a French downgrade, saying during a visit to São Paulo that it was probable that Paris would face “more jolts” as it battled to overcome the crisis. He was the fourth senior government member this week to suggest that a downgrade was looming, including President Nicolas Sarkozy.

Mr Noyer’s comments came as ratings agency Fitch downgraded the debt ratings for five major European commercial banks and co-operative banking groups, including two in France, citing the euro zone crisis and stronger headwinds facing the banking sector.

The ratings firm lowered the long-term issuer default and viability ratings by one notch for French banks Banque Fédérative du Crédit Mutuel and Crédit Agricole, Danish lender Danske Bank, Finland’s OP Pohjola Group and Holland’s Rabobank Group.

The move follows a review by Fitch of large European banks. Fitch said the downgrades of Danske Bank and Crédit Agricole reflect their subsidiaries’ exposure to troubled euro zone countries.

Mr Sarkozy’s centre-right government had until this week stressed the importance of preserving the country’s triple A, making it a central political goal. It has rolled out two emergency budget packages since August in a move to contain France’s rising debt and hold on to the rating.

But officials now argue that markets have already largely priced in the additional borrowing costs that would be a principal effect of a downgrade.

With yields on French 10-year bonds still only just above 3 per cent despite recent rises, they argue the country could withstand even a further increase.

However, a French downgrade could still cause major upheaval for the euro zone’s main financial rescue fund, the European Financial Stability Facility, which also has a triple A rating but has been put on credit watch by Standard Poor’s.

The EFSF’s €440 billion in lending capacity is based on guarantees from the six euro zone countries with triple A ratings, and a French downgrade would mean the fund would lose €158 billion in those guarantees. – (Copyright The Financial Times Limited 2011)