Downgrade for U.S., but no downgrade for France

Commentary about business and finance.
Aug. 17 2011 5:52 PM

S&P's French Kiss

France deserves a downgrade at least as much as the United States.

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The ramifications of all of this are really unpleasant, because France's sovereign guarantees provide the second-largest contribution (behind Germany's) to the EFSF. The EFSF uses its resulting AAA guarantee to borrow cheaply. If France's rating changes, that will throw the EFSF mechanism for a loop.  And if France is downgraded, then French banks probably will have to be downgraded, too. That, in turn, may mean other European banks will be downgraded too. Such cascading downgrades would increase the funding pressures on European banks at a uniquely inopportune moment.  

By downgrading the United States, Standard & Poor's has created a dilemma for itself. If there is to be any logical consistency to S&P's ratings, then France can't be AAA when the U.S. isn't AAA. But if France loses its AAA rating, all hell will very likely break loose. S&P can lose whatever credibility it has left, or it can lose whatever friends it has left.

Correction, Aug. 18, 2011: This article originally and incorrectly said that Standard & Poor's and Egan Jones downgraded the United States' crediting rating to AA. (Return to the corrected sentence.) Correction, Aug. 19, 2011: The article also originally stated that Mark Blyth was a professor at Dartmouth. (Return to the corrected sentence.)