November 29, 2011 / 1:58 AM / 6 years ago

S&P may cut France rating outlook - paper

Chocolate bars in Euro banknote design are on display at a candy shop in Vienna, August 19, 2011. REUTERS/Heinz-Peter Bader/Files

PARIS (Reuters) - Credit rating agency Standard & Poor’s could change its outlook on France’s AAA rating to negative within days, a French newspaper reported on Monday, adding to fears France may lose its position among the top rank of sovereign borrowers.

French Prime Minister Francois Fillon dismissed the report as baseless and S&P declined to comment on the story, which was based on anonymous sources.

If true, it would signal that the risk of a downgrade has risen after months of concern about the impact of sluggish growth and the costs of the euro zone debt crisis on public finances in France, the bloc’s second-largest economy.

Economic and financial daily La Tribune said S&P -- which on Friday cut Belgium’s credit rating to AA from AA+ -- had planned to make an announcement on France on the same day but had postponed it for unknown reasons.

“It could happen within a week, perhaps 10 days,” La Tribune quoted a diplomatic source as saying of a change to the outlook.

The euro briefly dipped on the report, which coincided with news that another rating agency, Moody‘s, could downgrade the subordinated debt of a swathe of euro zone banks, but later edged up against the dollar.

“I can tell you that La Tribune is reporting nonsense,” Fillon told Reuters on the sidelines of a conference.

French Finance Minister Francois Baroin said earlier the focus should not be solely on France and that while the euro zone debt crisis was serious, Paris was “clear-sighted” on it.

He also ruled out a third round of budget cuts, as called for by the Organisation for Economic Co-operation and Development, which said a likely recession would drag French growth far below government targets next year.

“Everyone is concerned, not just France. It’s all the euro zone countries,” Baroin told France Info radio, asked about the La Tribune report.

“France is not an island or economically cut off from the world. It depends on different parts of the euro zone for a large part of its economic activity and that’s why we are, to a large extent, clear-sighted on the crisis.”

He said the government was sticking to its 2012 growth forecast of 1 percent, and said that allowed for elbow room in the budget.

“However the economy evolves in the weeks ahead, we are maintaining our forecasts,” said Baroin, who will meet other euro zone finance ministers in Brussels on Tuesday to agree on details of bolstering the bloc’s bailout fund.

Bearish sentiment towards France appeared to be affecting the French public, however, with an opinion poll by Harris Interactive showing on Tuesday that two French people out of three would not be willing to buy French bonds to finance the public debt under current market conditions.

France’s rating outlook is stable with S&P and Fitch Ratings, but Moody’s is evaluating its outlook. Months of talk that a downgrade could be on the cards is rattling the French government, which would be hit by up to 3 billion euros a year in extra interest payments if its rating was cut by one notch.

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President Nicolas Sarkozy, who faces a tough re-election battle in April, is determined to avoid going down in history as having let France lose its cherished triple-A status.

A French downgrade could also hamper the ability to borrow of the EFSF euro zone’s bailout fund, whose own triple-A rating depends on those of the six top-grade countries that underpin it -- a potential body blow to the bloc’s ability to rescue heavily indebted member states.

The yield premium investors demand to hold French 10-year OATs rather than low-risk German bunds rose on Tuesday to as high as 142 basis points but later fell back to 126 bps.

With French 10-year yields already at 3.60 percent, Rabobank strategists said the country’s debt was already trading as if it had been downgraded and therefore the market impact of any rating change might be relatively small.

The French treasury is set to auction up to 4.5 billion euros of six- to 30-year OAT bonds on Thursday, its last OAT auction of the year and one of a barrage of euro zone debt auctions totalling some 19 billion euros this week.

Italy’s borrowing costs hit a euro lifetime high on Tuesday, with the yield of nearly 8 percent on its new three-year bond almost three percentage points more than at the last such auction one month ago.

An S&P spokeswoman in Paris said the agency did not comment on rumours. A spokesman in Melbourne also declined to comment.

On Nov. 10, Standard & Poor’s mistakenly announced that it had cut France’s sovereign rating, frightening investors already anxious over Europe’s worsening debt crisis.

The announcement helped push the yield gap between French 10-year bonds and Bunds to a peak of around 190 basis points on November 11. The cost of insuring French and other euro zone states’ bonds against default has also risen to record highs this month on fears the debt crisis will spiral out of control.

Last week, Fitch said France’s debt and deficit levels remained consistent with a triple-A rating but the euro zone’s No. 2 economy would have limited room to absorb new shocks to public finances without endangering that status.

Reporting by Catherine Bremer, Leila Abboud, Matthias Blamont and Blaise Robinson in Paris, Cecile Lefort in Sydney and Kirsten Donovan in London; Editing by Catherine Evans

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