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/OATS/RATINGS: Downgrade Risk Evident, With S&P Set To Update On France After Hours

FRANCE
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S&P is set to provide an update on France after hours, with downgrade risk apparent.

  • S&P currently has France at AA; Outlook Negative.
  • That is one notch above the equivalent rating at Fitch (AA-; Outlook Stable).
  • Moody’s has France at the S&P equivalent rating (Aa2), but with a ‘Stable’ outlook.
  • A wider-than-expected ’23 deficit and flatter debt/GDP path in the government’s projections generated French fiscal worry in late March/early April.
  • That drove spread widening for OATs, although the lack of negative ratings action from both Fitch & Moody’s in the interim, along with greater hope surrounding GDP growth, placated some of the worry, allowing spreads to retrace from wides.
  • Subsequent action and rhetoric from French policymakers highlights a need to cut spending, but poses risks to the ruling political party.
  • A one-notch downgrade from S&P would likely promote fresh OAT spread widening, although a sizeable move beyond year-to-date wides vs. Bunds seems unlikely as many expected such action back in early April (assuming a Stable outlook alongside such a downgrade).
  • Select sell-side comments on this evening's update can be found below:
  • Commerzbank: As the outlook is already negative and the deficit trajectory has clearly worsened since December, a downgrade to AA-/stable should not be a big surprise.
  • Danske: Given that the fiscal outlook has worsened, we expect a one-notch downgrade tonight. This should have a modest widening impact on OAT spreads.
  • Mizuho: We see a risk of a downgrade for France, which would likely drive OAT-Bund spreads back to the April wides.
  • UniCredit: There is only a small difference between the government’s latest debt/GDP forecasts and those of the agency’s. We think that the room for a spread significant widening is limited given that the majority of OAT holders are not very sensitive to changes in ratings. The elevated liquidity of OATs and an improving picture for fixed-income markets, in light of expected ECB rate cuts will also be supporting factors.

Fig. 1: 10-Year OAT/Bund Spread (bp)

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S&P is set to provide an update on France after hours, with downgrade risk apparent.

  • S&P currently has France at AA; Outlook Negative.
  • That is one notch above the equivalent rating at Fitch (AA-; Outlook Stable).
  • Moody’s has France at the S&P equivalent rating (Aa2), but with a ‘Stable’ outlook.
  • A wider-than-expected ’23 deficit and flatter debt/GDP path in the government’s projections generated French fiscal worry in late March/early April.
  • That drove spread widening for OATs, although the lack of negative ratings action from both Fitch & Moody’s in the interim, along with greater hope surrounding GDP growth, placated some of the worry, allowing spreads to retrace from wides.
  • Subsequent action and rhetoric from French policymakers highlights a need to cut spending, but poses risks to the ruling political party.
  • A one-notch downgrade from S&P would likely promote fresh OAT spread widening, although a sizeable move beyond year-to-date wides vs. Bunds seems unlikely as many expected such action back in early April (assuming a Stable outlook alongside such a downgrade).
  • Select sell-side comments on this evening's update can be found below:
  • Commerzbank: As the outlook is already negative and the deficit trajectory has clearly worsened since December, a downgrade to AA-/stable should not be a big surprise.
  • Danske: Given that the fiscal outlook has worsened, we expect a one-notch downgrade tonight. This should have a modest widening impact on OAT spreads.
  • Mizuho: We see a risk of a downgrade for France, which would likely drive OAT-Bund spreads back to the April wides.
  • UniCredit: There is only a small difference between the government’s latest debt/GDP forecasts and those of the agency’s. We think that the room for a spread significant widening is limited given that the majority of OAT holders are not very sensitive to changes in ratings. The elevated liquidity of OATs and an improving picture for fixed-income markets, in light of expected ECB rate cuts will also be supporting factors.

Fig. 1: 10-Year OAT/Bund Spread (bp)

Keep reading...Show less