Ratings agencies suffer from a credibility problem, judging from market reactions to some of their most dramatic moves. France is a prime example, with investors flocking to snap up its bonds even more hungrily than they pursue German Bunds.
Bloomberg reported Monday that although it’s been eight months since S&P cut the French down to size, creditwise, investors have paid little or no attention and instead have been eager to invest in the country's debt, driving yields down with their enthusiasm.
Standard & Poor’s downgraded France to AA+ from AAA back in January, along with rate cuts to eight other eurozone countries. The ratings agency cited the failure of policymakers to control the debt crisis in Europe and added that some countries’ refinancing costs could stay high.
But that has not been the case. France’s yields on 10-year bonds have dropped faster than the yields on either Bunds or Treasuries, and its 1.07 trillion euros ($1.4 trillion) in debt maturing in a year or more has gained 7.4%. That’s more than double the returns for the rest of the global government bond market, and even tops Britain, Germany and Australia.
France isn’t the only one, either. The U.S. lost its AAA credit rating after the budget standoff in 2011, but its borrowing rates instead of soaring have plummeted. Bloomberg data show that government bonds react about half the time in the opposite way to what was expected, rendering such ratings, if not moot, at least questionable.
“Ratings companies are losing credibility,” said Shinji Kunibe in the report. Kunibe, chief portfolio manager for fixed-income investment in Tokyo at Nissay Asset Management Corp., which oversees the equivalent of $66 billion, was quoted saying, “Nations like France that are rated AA are regarded as totally safe.”
President Francois Hollande isn’t resting on his laurels, however. He said in the report, “The state borrows on the market at rates that are historically low. I’m proud that France is among countries that has the capacity to borrow at such low rates, but we can’t just bank on this situation.” The cost of France’s debt service, nonetheless, has fallen; this year such payments will total 47.4 billion euros, instead of the estimate made by the Finance Ministry in September of last year that they would reach 48.8 billion euros.