EMRE DELİVELİ > French turkey au sauce Hollandaise

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As I was expecting, Moody’s did not raise Turkey’s credit rating to investment grade in its annual review released a day before its credit risk conference in Istanbul on Nov. 21.

I have always argued that while an upgrade is a possibility in 2013, it would be too optimistic to expect one this year, but some analysts were nevertheless hopeful. However, the interesting Moody’s rating decision of the week was not about Turkey: while Americans were getting ready for their annual Thanksgiving turkey dinner, the agency stuffed France by stripping the country of its triple-A rating on Monday.

Developments up to the downgrade should have delighted conspiracy theorists: Several investment banks published negative reports on the country’s economy last week. Then, The Economist featured France’s woes on its cover last Friday, arguing that the country was “the time time-bomb at the heart of Europe,” which could become the biggest danger to the euro.

In its note announcing the decision, Moody’s argued that it cut France’s rating based on three interrelated factors. The first is the country’s market rigidities and lack of competitiveness. These are indeed important issues, but they did not suddenly appear overnight. In fact, anyone who has lived in France for more than a couple of weeks ends up being fed up with everyday nuisances. Besides, I am très étonné that this factor was mentioned a week after a major pact on competitiveness was announced. Moody’s declares that France has a poor track record of implementing such measures, but some of the reforms, such as the corporate tax credits offset by value-added tax hikes set for 2014, are too specific to back down from.

A second factor is that “the predictability of France’s resilience to future euro area shocks is diminishing.” Moody’s argues that French banks are dangerously exposed to peripheral Europe, especially Italy. But Moody’s put France’s rating under review on July 23. Since then, the probability of a crisis emanating from Italy has fallen considerably thanks to the European Central Bank’s more determined stance.

The agency’s third factor is that “France’s fiscal outlook is uncertain, as a result of its deteriorating economic prospects.” While I am no expert on the French economy, its budget and debt figures are worrying. Indeed, French economists don’t find the country’s fiscal targets and growth forecasts very realistic.

As The Economist details in its 14-page special report, France does have serious problems that need to be addressed right now. It all boils down to whether President François Hollande will be able to undertake the necessary reforms, or whether investors will be eating a Gallic turkey, or rather rooster, au sauce Hollandaise next Thanksgiving.

But I am not sure that a ratings cut right now can be justified. Markets seem to agree with me, as French government bonds barely reacted to the downgrade. Perhaps it is not just the Turks who are growing increasingly skeptical of the rating agencies.


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Emre Deliveli

11/24/2012 9:01:06 AM

@Burak Tekes: I am not claiming France is in very good shape; they are not- in fact, I am saying, at the end of the column, that they will go down the drain should they not reform. Nor do they deserve AAA. S&P got it right by downgrading them early in the year. BUT I argue that two of the three reasons Moody's gives don't make sense, at least at this moment.

Burak Tekes

11/23/2012 4:15:31 PM

I am surprised France got a pass from you that easy. Your whole argument is based on the fact that French 10-yr trades at a low level & French Ger spread is still tight. It's pretty obvious France is treated as a core country. And the market will sooner or later realize France is not  Germany and also not a currency issuer. So, the downgrade now makes perfect sense. In my view this is one of the rare moments timing was right, we'll see.

dogan kemal ileri

11/23/2012 3:29:23 PM

Holland has had enough time to cancel the 5 very important chapters they have vetoed against Turkiye's accession to the EU which only proves that Sarkozy who took these actions in the first place was only then front man,the real force is Merkel of Germany as we all know.They are planning to let Turkiye into the EU one day but it will be a different EU and Turkiye will be admitted to the second tier and devoid of real political power.No point in joining if we lack the power to influence it Emre.

dogan kemal ileri

11/23/2012 3:23:08 PM

The ratings agencies have lost several layers of credibility having even failed in assesssing the banking crises.They are institutionally racist against Turkiye giving several Christian countries better grades than Turkiye when Turkiye's economy was several notches above those.I am not sure if anybody takes any notice of them anymore they seem rather superfluos.Most traders are treating Turkiye as investible anyway.So who cares
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