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/RATINGS: After Hours Negative Outlook Moves For France Seem Likely

FRANCE
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French fiscal deterioration has left focus on this evening’s potential sovereign rating updates from Fitch (current rating: AA-; Outlook Stable) & Moody’s (current rating: Aa2; Outlook Stable). Most flag at least some odds of negative outlook moves from Fitch & Moody’s later today, with widespread expectations for a one-notch rating downgrade from S&P on 31 May (current rating AA; Outlook Negative). Those moves seem to be at least partially discounted by OATs at present. Some sell-side thoughts can be found below:

  • Citi: Moody’s and Fitch might both change the outlook on France’s rating to negative in coming months. Any such action this week is unlikely to be a surprise. A bearish OAT surprise would be a rating downgrade from either agency, which is rare from a stable outlook and would infer a sharply deteriorating debt path for the sovereign - we think this is unlikely.
  • Commerzbank: In its latest note Moody’s concludes that France's debt affordability metrics will deteriorate. A change in the outlook to negative seems due, while we consider a downgrade to Aa1 unlikely at this stage…Based on the latest note, our base case would be for Fitch to affirm its current rating, while risks remain for an outlook change to negative.
  • J.P.Morgan: We see a high chance of Moody’s putting France at negative outlook with a decent chance of a rating downgrade. We see a small chance of Fitch putting France at negative outlook but no risk of a downgrade.
  • Natixis: The market has already reacted to bad news on the French public accounts. In our central scenario (with negative action by Moody's and a downgrade by S&P) we believe that the 10-year OAT-Bund spread will remain influenced first and foremost by risk appetite and monetary policy expectations from the ECB and the Fed. Action by the two rating agencies could create a gap, but this would be limited.
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French fiscal deterioration has left focus on this evening’s potential sovereign rating updates from Fitch (current rating: AA-; Outlook Stable) & Moody’s (current rating: Aa2; Outlook Stable). Most flag at least some odds of negative outlook moves from Fitch & Moody’s later today, with widespread expectations for a one-notch rating downgrade from S&P on 31 May (current rating AA; Outlook Negative). Those moves seem to be at least partially discounted by OATs at present. Some sell-side thoughts can be found below:

  • Citi: Moody’s and Fitch might both change the outlook on France’s rating to negative in coming months. Any such action this week is unlikely to be a surprise. A bearish OAT surprise would be a rating downgrade from either agency, which is rare from a stable outlook and would infer a sharply deteriorating debt path for the sovereign - we think this is unlikely.
  • Commerzbank: In its latest note Moody’s concludes that France's debt affordability metrics will deteriorate. A change in the outlook to negative seems due, while we consider a downgrade to Aa1 unlikely at this stage…Based on the latest note, our base case would be for Fitch to affirm its current rating, while risks remain for an outlook change to negative.
  • J.P.Morgan: We see a high chance of Moody’s putting France at negative outlook with a decent chance of a rating downgrade. We see a small chance of Fitch putting France at negative outlook but no risk of a downgrade.
  • Natixis: The market has already reacted to bad news on the French public accounts. In our central scenario (with negative action by Moody's and a downgrade by S&P) we believe that the 10-year OAT-Bund spread will remain influenced first and foremost by risk appetite and monetary policy expectations from the ECB and the Fed. Action by the two rating agencies could create a gap, but this would be limited.