FX.co ★ UBS finds EU creditworthiness decent despite France’s potential downgrade

A potential deterioration of France’s sovereign credit rating is unlikely to jeopardize the European Union’s creditworthiness. Analysts at Swiss financial conglomerate UBS reached this conclusion in a special report. The experts underscore that even if France’s rank is revised down, it would not automatically trigger a downgrade of the bloc because of the diversification of member-state guarantees and rating agencies’ methodologies.

The bank’s assessment precedes a scheduled review of France’s rating by Moody’s. Moody’s currently assigns France an “Aa3” rating with a negative outlook, while S&P and Fitch maintain “A+” ratings with stable outlooks. At the same time, the EU itself holds the highest ratings: “Aaa” from Moody’s, “AAA” from Fitch, and “AA+” from S&P. According to UBS’s calculations, France’s sovereign rating would have to fall all the way to “Baa3” (on Moody’s scale) or “BBB” (on S&P’s scale) before it would alone affect the EU’s debt quality on a weighted-average basis.

Under Fitch’s methodology, the direct risk is even lower, since France has already been removed from the pool of “AAA”-rated issuers that underpin the union’s creditworthiness. Instead, analysts define Germany’s fiscal position as far more vulnerable, since it could undermine the ability of key contributors to cover the bloc’s obligations.

Analysts think that political resistance to deeper fiscal integration poses the main long-term challenge. France attempts to cut its EU budget contributions, whereas Germany is reluctant to approve new joint borrowing. Over time, this could limit the expansion of the European bond market without affecting the safety of bonds already issued.