World Agencies Confirm France’s Rating

13 August 2011
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Yesterday, ratings agencies Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings confirmed France’s top-tier credit rating after the average yields on the country’s debt securities went up amid fears that the European sovereign debt crisis is worsening.

The forecast for France is stable and its triple-A rating is “justified,” said Moritz Kraemer, the head of European sovereign ratings at S&P. Likewise, Francesco Meucci, a spokesman for Moody’s, said that the country’s rating was “stable.” According to Fitch spokesman Brian Bertsch’s latest report from May 31, France maintains its triple-A rating with a stable outlook. Compared to German bonds, the risk premium on sales of 10-year French bonds has shot up 87 basis points, although both countries have triple-A ratings. This spread is trading almost three times higher versus 33 basis points for the entire year of 2010 and versus 17 basis points in the second half of the past decade. The cost to insure French government debt against default rose to a record high today. French bonds became the most costly of the triple-A rated government securities after investors pushed its rate up amid speculation that France could become the next country to get downgraded from its top-tier rating, much like the US did on August 5. French credit default swaps are trading at 175 basis points, more than twice as much as German swaps, which are currently at 86 basis points. Credit swaps pay the purchaser the value of the bond minus the amount of the unpaid debt if the borrower fails to pay back the debt. One basis point is equivalent to $1.000 of bond yields per year on a contract securing $10 million of debt.

Meanwhile, DT Trading analysts are also watching the current dynamic between China and the US. After Beijing offered harsh criticism of the US following its S&P downgrade, it decided to act. While demand on American government bonds – China’s main reserve portfolio – is increasing and yields are falling, Beijing decided to seize the opportunity and get rid of part of its dollar portfolio before the massive demand on the obligations began. The yuan appreciated to 6.4 against the dollar for the first time in 17 years; it was also boosted by the Fed’s promise to keep US interest rates at an all-time low. The official theory is that China will use exchange rates to curb inflation, although DT Trading analysts think that the more likely reason for the yuan’s growth is the scenario described above.

According to China’s currency trading system, the yuan was up 0.36% to 6.3948 against the dollar as of 1:47PM yesterday in Shanghai. It touched 6.3938, its highest rate since 1993. The central bank raised the upper limit of the fluctuation corridor 0.27% to 6.3991.

DT Trading Limited Analytical Department

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