The latest in the European sovereign debt crisis is the downward grading of France’s AAA rank by Standard and Poor, the most authoritive credit rating agency. This is a major blow to one of Europe’s largest economies and because of the countries massive influence, is sending ripples across the continent. This article examines the implications of the new ranking in the Euro zone and currency market in general. The debt in France is one of the largest in the world; over $1.6 trillion is owed making France the fourth in the list of largest sovereign borrowers in the world.
Sovereign Debt and Europe
Europe will be disappointed with this new rating, as European nations already engulfed by the Euro sovereign debt crisis were relying on the leverage of France and other high credit-ranking members to rescue the flailing Euro. Now only Germany remains, but it is a tall order to expect a single country to bail out the entire Euro zone. The fate of the Euro is hanging precariously by a thread as more member states fall in their sovereign debt ratings.
Sovereign Debt and France
It’s also worth examining the implications of this new ranking for France’s internal administration. It is safe to say that Nicolas Sarkozy’s re-election campaign is in tatters. He promised the nation that his administration would keep the AAA rating intact as well as the country’s ‘national prestige’, but after this massive blow of the EU sovereign debt crisis and a few others the national trust has all but diminished. There are two ways that the politics of the county could go; either towards conventional socialist Francois Hollande with his dismissive view towards austerity or far-right Marine Le Pen. The latter is campaigning for the return of the Franc, sure to aggravate the banking system of France and cause further problems in sovereign debt management.
The Market Reaction to the French Sovereign Debt Levels and Rakings
On paper the downgrade is a calamity but the market reactions to this sovereign debt data were surprisingly tame. The Euro showed only a bit of instability. French trade yields only increased by a small margin, but in comparison to a regular day of trading hardly any difference can be noticed. The only explanation is that the downward motion of rankings within the context of the sovereign debt crisis is failing to shock or surprise anymore. Traders are almost becoming desensitised. Judging by the sovereign debt ratings by country (think Italy, the United States, China and Japan) downgrading is a trend that is expected to continue. The question is whether the sovereign debt levels of the United Kingdom and Germany can withstand the pressure.
Penny Munroe is an enthusiastic follower of currency market trends. Her interest stems from her first metatrader 4 download which she used to open a metatrader 4 demo account. She is now an active currency trader.