December 17th 2011 – ParaNoyer

The gloves are off! As the French prepare for the loss of their AAA status, the governor of the Bank of France, Christian Noyer, suggests that the UK should be first in the firing line as the data for inflation, real GDP growth and government deficit to GDP are worse across la Manche from where he sits. A month ago French 10 year yields were 3.8%. Today they are just above 3%, so maybe the markets are giving him the benefit of the doubt, but let us not forget that the maturity timeline of French bonds is considerably shorter than the UK. They are about to have a funding problem and that is one of the many issues that the much maligned ratings agencies are concerned about.

This is a problem that they share with Italy and Spain, two struggling euro nations, whose debt, along with a toxic pile of “lesser” Club Med paper, is well represented on the balance sheets of French banks, although almost certainly at highly unrealistic valuations. Eurozone bond yields have had some pressure taken off them by the ECB that is now offering 3 year money, at 1%, to eurobanks, who can then buy Spitalian debt at yields of around 6% (for now…), locking in a very decent return, unless those debt instruments become subject to a proper Grecian haircut down the road. In that case the banks would find themselves in exactly the same situation they now find themselves in, ie insolvent, only more so.

The other factor that Noyer has chosen to ignore is that the UK banks have been through a recapitalisation process, which the French and eurozone banks have avoided so far, ex Dexia and shortly, one assumes, Commerzbank. Let’s not kid ourselves that UK Banking plc is a totally robust picture of health, but it has to be said, so I will, that France has significantly greater problems. On Friday the Basel Committee on Banking Supervision confirmed that French banks such as Soc Gen and Credit Agricole could not double count assets in their insurance company subsidiaries for Tier 1 capital purposes. This less than gallant Gallic attempt, to dilute the rules requiring the banks to hold more capital against “unexpected” losses, was thwarted by the Mexican representatives, who know a thing or two about a good currency crisis. Even more damning was the following statement, on the same day, by the rating agency, Fitch.

“Relative to other ‘AAA’ Euro Area Member States, France is in Fitch’s judgement the most exposed to a further intensification of the crisis. It has a larger structural budget deficit and higher government debt burden relative to Euro Area ‘AAA’ peers. Moreover, relative to non-Euro Area ‘AAA’ peers, notably the US (‘AAA’/Negative Outlook) and the UK (‘AAA’/Stable Outlook), the risk from contingent liabilities from an intensification of the Eurozone crisis is greater in light of its commitments to the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), as well as indirectly from French banks that are less strong than previously assessed as reflected in recent negative rating actions by Fitch.”

“Para Noyer” might like to reflect on the “stable outlook” for the UK’s AAA rating and the fact that Fitch’s parent company Fimalac is, would you believe it, French, before he next thinks about calling the kettle black.