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Who should be single A rated france or italy


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Italy have been for months under pressure from markets and France relatively unscattered even if froa few weeks its spreads have increased; according to numerous economic indicators France should hardly be better rated than Italy and does not deserve a AAA rating.

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Who should be single A rated france or italy

  1. 1. Who should be single A rated: Italy or France?I am amazed that France rating has not been downgraded as yet: it does not deserve a AAAby a long margin.First, have a look at current rating for European countries (please note that since this table waspublished, Moody’s downgraded Italy 3 notch to A2 from Aa2, i.e. the same as Poland or Cyprus).This downgrade is probably justified in itself, but I am questioning how France can retain the toprating. 1
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  3. 3. data published by the OECD in May and the IMF in September, France is in a worse shapethan Italy according to many indicators.1. Debt/GDPIf the debt/GDP is the Achilles heel to Italy, its growth is nowhere comparable to France’s which iscatching up quickly: +6% for Italy for the period 2000-2012 and +52% for France.2. Real DGP growthFrance is much better off with GDP growth twice the pace of Italy during 2000-2012 at 1.5%.French growth is however mainly due to domestic consumption spurred by the state welfare thatFrance can no longer afford. 3
  4. 4. General Government Financial BalancesThe French welfare state largess translated into higher budget deficits whatever the Government(France hasn’t had any balanced budget since 1978): the Maastricht 3% deficit ceiling wasrespected only 4 times since 2000, France doing much worse than the eurozone average since2008 (-5.9% vs. -4.6%); - Italy fared better with -4.1%. 4
  5. 5. further the budget, the situation looks even much worse for France: its primary budgetbalance has been negative for 10 years whilst Italy had always been positive (note that Italy’sprimary budget is even much better than Germany). The IMF does not expect France’s primarybudget to become positive before 2015. 5
  6. 6. Trade balance (goods & services)This indicator is not helping out France’s precarious position, to the contrary. Since 2005 Francehas experienced increasing trade deficits, together with Italy but with an incomparable magnitude:USD 489 billion cumulated, 2.3 times more than Italy; Germany in the meantime accumulated aUSD 1550 billion surplus. In percentage of GDP the analysis is the same.True France enjoys a net investment income whilst Italy is negative, which translates into acomparably better current account for France.5. Unemployment rateUnemployment is another indicator where France is not comparing well with Italy,underperforming since 2003. 6
  7. 7. does not deserve the top rating with the three main rating agencies (by the way,when European politicians accuse these agencies of an American plot against Europe, beyondbeing a “scapegoating” affirmation, they should remember that Fitch belongs to a Frenchcompany, Fimalat).According to the indicators presented, France should hardly be better rated than Italy.Add guarantees to be given by France for Dexia’s failure (where France should bear most of theburden since most of the problem arises from Dexia CLF - the French part of the group with 259 xleverage!) and I do not see how and why France will keep its AAA. Belgium is under watch forpossible downgrade following Dexia’s bankruptcy. It is also quite “funny” to watch France armtwisting Belgium to bear most of the burden in order to keep its AAA (that it will loose anyway):how guarantees for the EUR 95 billion impaired portfolio will be shared (EUR 66 billion in DexiaCLF balance sheet)…The “funniest” of all is that Dexia CLF is going back to CDC (the French state owned financingvehicule) where it originally came from under the name of CAECL. From privatization tonationalization, 20 year of incompetent board of directors that let an incompetent management 7
  8. 8. all around the world into risky businesses without the means (read capital) of theirambitions.Please note that I do not blame the new management that arrived after the 2008 rescue sinceDexia was doomed: there was not much they could do, and they probably did what they could withthe legacy they got.Source:WSJ: S&P Cuts Italys Sovereign-Debt Rating World Economic and Financial Surveys OECD Economic Outlook No. 89,3746,en_2649_34573_2483901_1_1_1_1,00&&en-USS_01DBC.htmlMarkets & Beyond: Dexia in 2 slides and a few words 8