PARIS (MNI) – The limited initial reaction of bond markets to
reports of a imminent downgrade of France’s triple-A credit rating by
Standard & Poor’s suggests that the fallout can be manageable if the
actual downgrade remains limited as well, analysts said.

The French business daily Les Echos reported that France was likely
to slip only one notch, while Italy, Spain and Portugal could fall by
two. Germany, the Netherlands, Finland and Luxembourg would be spared
for the moment.

Of greater concern is an eventual contamination of the Eurozone
bailout fund EFSF, whose own rating depends on credit-worthiness of the
countries that back it, including France, the analysts said.

While France still preserves its AAA status with other rating
agencies, Fitch has placed the country on “negative” outlook and Moody’s
may follow suit after announcing a review last October.

The market has been pricing in a cut in France’s AAA rating for
months, said Marco Valli, chief Eurozone economist for UniCredit in
Milan. “So if the ratings cut is only one notch, I think it should be
manageable.”

“In practice, the downgrade should not have an absolutely dramatic
impact,” agreed BNP economist Dominique Barbet. “The least one can say
is that the news had been expected.”

Since the rumors began circulating Friday afternoon, French yields
rose by eight basis points and Germany’s declined by three, Barbet
noted. The spread between two widened to 134 bps and has since narrowed
somewhat and remain below levels seen earlier this week and well below
those late last year.

Still, the loss of the prime borrower status will “nearly
automatically” affect other public entities in France, whose ratings are
linked to those of government, Barbet reminded, citing the CADES agency
that carries the debt of the social security system, public companies
like the railway system SNCF and the utility EDF, and municipalities.

“It is very rare” that a subordinated entity can preserve a higher
rating that its sovereign state, he said. Still, most of these entities
have “already been paying more for some time.”

Leading French banks managed to escape an investor reaction on
Friday, as stock market gains were registered for Societe Generale and
especially BNP Paribas, while Credit Agricole was off slightly.

However, a downgrade of more than a single notch could raise more
doubts about the EFSF’s ability to serve as a firewall to block
contagion from Greece other euro countries, Valli cautioned,

In that case, the only way the EFSF could avoid a downgrade would
be if other Eurozone states stepped up their commitments to the fund,
Valli said. “This is unlikely as it would put too great a burden on the
other countries,” he warned, while observing that EFSF bonds have not
traded as AAA securities for quite some time.

The next test for the EFSF will come next week when it returns to
the market to borrow E1.5 billion in bills.

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