A terrible time to accidentally downgrade France, a terrible time for S&P too

11th November 2011

French borrowing costs jumped to 3.46 per cent on 10 year bonds – a rise of 27 basis points on the day.

The French government is now calling for an investigation by European regulators but bond dealers, some of whom dumped French bonds, are furious too.

S&P was forced to eat humble pie yesterday. Its statement read as follows – "As a result of a technical error, a message was automatically disseminated today to some subscribers of S&P's Global Credit Portal suggesting that France's credit rating had been changed. This is not the case: the ratings of Republic of France remain triple A with a stable outlook and this incident is not related to any ratings surveillance activity. We are investigating the cause of the error."

The Wall Street Journal  quotes one former sovereign debt analyst at Moody's, David H. Levey,  saying: "If it had been Germany, anybody would have just laughed it off. But with France there is enough questioning going on that it's particularly one you don't want to send any false information about."

The French may continue to fume because their 10 year bonds are still more expensive than before the mistake.

The WSJ also suggests, despite denials, from S&P that such mistakes can only happen during a review.

And a former employee Jean-Baptiste Carelus hasn't helped matters. He told the WSJ: "The fact that there is an alert erroneously placed about France says that they may be deep in a review of France."

FTAlphaville is deeply cynical as well. It wrote: "How strange is that? And obviously not related to any ratings surveillance activity whatsoever. After all why would anyone be looking to downgrade France? That's clearly ridiculous, right?"

Back in August on Chron.com, a Houston news website, business writer Loren Steffy summed up why S&P is so unpopular stateside from misrating Enron to misrating mortgage backed securities.

But the real threat, for now, must be in Europe.

Just four days ago, FT.com reported on credit agencies trying to fight off proposals from the European Commission which would restrict the agencies' powers.

The proposals could, for example, suspend the ratings of stricken sovereign debt in exceptional circumstances, and force issuers i.e. private sector companies and investment banks, to rotate the rating agency they use at least every three years, and in some cases every year with a delay of as long as four years before that rating agency could be rehired.

The agencies have argued that the proposals would actually damage confidence in capital markets. Their lobbying effort has been led by Moody's not S&P and it must be likely they now take even more a back seat.

It seems that for France, this is a terrible time for this accident, but as the Commission is due to debate rating agency reform in the next fortnight, it may terrible time for ratings agencies too.

 

More from Mindful Money:

France is no longer the crowing cockerel of 2008/09 and faces real financial problems

Britain's AAA credit rating reaffirmed, but what difference does it make to investors?

Do credit ratings matter?

A Network of Debt: Why it matters who owns it

What do bond yields mean and what do they imply for an economy?

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