France’s AAA rating under increased pressure as cost of borrowing rises

THE interest rate France pays to borrow money rose again yesterday — and along with it fears that the country will lose its cherished AAA credit rating.

Theoretically at least, that rating — the highest a nation can have — allows France to borrow money from the markets cheaply. But France pays more than other European countries that have a Triple A — like Denmark, the Netherlands and Switzerland.

The yield on its 10-year bond — the usual yardstick for a country’s borrowing costs — rose 0.05 percentage points to 3.42%. That’s roughly twice Germany’s and well above the roughly 2% on 10-year US Treasury notes.

Some say with yields that high, France retains the AAA rating in name only, since the country has already lost the benefit of the rating, namely low borrowing costs.

No one is actually expecting France to default, but its higher yields reflect investor concern about France’s fundamentals: its overall debt load and the annual budget deficits it runs. And, since the credit ratings of France and Germany underpin the eurozone stability fund set up to tackle Europe’s debt crisis, a change in the French rating could be seismic, affecting the entire bailout plan.

Not to mention the fact that a lower credit rating could mean that President Nicolas Sarkozy gets tossed out of office in next spring’s presidential election. “Let’s not delude ourselves: In the markets, French debt is already not AAA,” Jacques Attali, an economist and adviser to Sarkozy, told La Tribune recently.

The government roundly denounced that comment, and Christian Noyer, the governor of the Banque de France, told Le Figaro it was preposterous to think that France wouldn’t repay its debts. That, in effect, is what a rating measures: It’s the agency’s assessment of how good a bet a country or a company is for investors.

Still, France hasn’t balanced a budget in three decades, and its deficit ran 7.1% of its GDP last year — more than twice the legal limit of 3% in the eurozone. It also is part of the 17-nation eurozone, and is paying a significant amount to help bail out other troubled members such as Greece, Portugal and Ireland.

The credit rating also has psychological and political importance — especially as France heads into an election year. Sarkozy, who is already polling poorly, and his conservative party know that losing the rating could seal their fate in the two-round election next April and May.

Sarkozy has not yet said he will run, but it’s widely assumed he will be the conservative UMP party’s candidate.

France had a preview of what the loss of the AAA rating might look like last week when a mistaken alert by Standard & Poor’s told some clients that France had been downgraded. The agency corrected the note an hour and a half later, calling it a technical error, affirming France’s AAA rating.

If France does get downgraded to AA+, it would still be in good company: Standard & Poor’s downgraded US debt to that level in August.