France deserves to keep top-notch credit ranking despite bank rescues

By Catherine Bremer and Leigh Thomas, Reuters

PARIS — France should retain its cherished AAA credit rating even if it shoulders billions of euros in liabilities for troubled Franco-Belgian bank Dexia and injects capital into other banks, analysts say, although the fine print of any move will be key. Limited loan guarantees, that would count as off-balance sheet items for public finances, and one-off investments in bank stock that should increase in value over time, would not translate into risks for sovereign debt, they say. However, the rescue of Dexia, and the possibility of plugging funds into other banks, will constrain what little wiggle room is left in state coffers weeks after the government painstakingly marked out 12 billion euros in savings aimed at safeguarding its triple-A badge. “Whether the aid for Dexia is limited to a credit guarantee or runs to an outright cash injection, it should have no effect on France’s credit rating,” said French economist Jacques Delpla, a veteran consultant and past government advisor.

Future recapitalizations of other troubled French banks, via low-priced equity stakes that could make the state a profit over time, should even be seen as rating-positive, he said. “Rating agencies judge the sustainability of a country’s debt. This would be a one-off investment that could yield big profits, so even if France spends a huge amount recapitalizing the entire bank system it should not affect its rating.” Forced into action by a nosedive in Dexia shares, France and Belgium have pledged to guarantee its loans and may also have to inject capital. Belgium wants the bill to be split equally. While details of the guarantees and a likely break-up of the bank will not be unveiled until after a weekend board meeting, France could end up backing tens of billions of euros in debt. Dexia had assets of more than 500 billion euros at end-June supported by equity of just 6.9 billion euros, which could be quickly eaten up if it suffers heavy losses on its exposures to the sovereign debt of Greece, Italy, Portugal and Spain.

The bank’s main problem comes from its reliance on short-term funding from money markets to support tens of billions of euros in mainly long-term loans with maturities that run to several decades.