L'analisi di Credit Suisse sugli scenari di mercato: che cosa succede se la Francia perde il suo rating tripla A?

We have argued for a while that it is in the economic interest of Core Europe to continue supporting the periphery (the cost of a bail-out is around €250bn, on our estimates, compared to the direct estimated cost for Core Europe of not bailing out the periphery at around €450bn versus, with the indirect cost infinitely higher. For more details see On a knife's edge, 5th August). However, our argument assumes that France will play its part in the bail-out efforts. We note that S&P on their conference call today have stated that no sovereign is currently at risk of being downgraded. Furthermore, a French sovereign downgrade is not our central scenario. However, we think it is nonetheless valuable to explore the impact of a possible French downgrade. The critical issue in this case is the consequences this has for the lending capacity of the EFSF, given that France contributes 20% of the EFSF guarantees (or up to 35% if only the AAA-rated countries contribute).

We see the following six possible scenarios:

1) The EFSF's credit rating is downgraded, but the facility continues to operate as before, with higher funding costs (we estimate around 100bps, which corresponds to the gap between yields on French and Belgian debt). We think this is the most likely option. We note that after a French downgrade none of the three biggest sovereign borrowers globally would have a AAA-rating (Japan, US and France) - i.e. many other sovereign borrowers are funding themselves without problems in spite of the absence of a AAA-rating.

2) The ECB buys more peripheral European debt. The ECB makes up for the reduced lending capacity of the EFSF by increasing its purchases of peripheral European sovereign debt in the secondary market (having bought an estimated €80bn so far). This would amount to a form of soft QE (as its would lead to a deterioration of the quality of the ECB's balance sheet) - or even hard QE (if the purchases are not sterilized, thus leading to an increase in the size of the ECB balance sheet). We note that this scenario could occur in combination with scenario 4 above. The only problem is that this would require the ECB to give up another one of its principles (as they would have to concede that their buying is not just "temporary", i.e. only in place as long as the EFSF is not fully operational).

3) The EFSF retains its AAA-rating in spite of the French downgrade with no impact on its lending capacity and cost of funding (low probability)

4) The EFSF reduces its lending capacity in order to retain its AAA-rating... low probability, given the perceived need to increase the size of the EFSF to ensure that Spanish and Italian funding needs could be met. On our calculations, the EFSF would require an effective lending capacity of around €1tn to avoid contagion

5) Germany and the other AAA Euro-area countries (Holland, Finland, Austria, Luxemburg) increase their contribution to the EFSF to ensure the AAA-rating is maintained without a reduction in the lending capacity... low probability, given political resistance in these countries to increase their burden in the bail-out efforts

6) Core Europe stop supporting the periphery - the main risk is that the remaining AAA-rated countries in the Euro-area would worry about the risk to their own credit rating - and would decide that it is no longer in their interest to support the periphery (or that the domestic political situation makes it preferable to stop doing so). Without support from core Europe, we think a break-up of the euro would be inevitable. We continue to think this is unlikely - but the chances of it happening would surely increase if France were to lose its AAA-rating.

Thus, the main implications of a French downgrade would, in our view, be:

- The probability of the European situation becoming a systemic crisis increases from 10% to 25%.

- There would likely be more fiscal tightening, which in turn would likely mean that Euro-area growth would likely be around 0% - 0.5% (this would increase our confidence in our underweight of Continental Europe and of European cyclicals).

- With none of the largest sovereign borrowers AAA-rated, we continue to think that high quality corporates look increasingly safer than most governments. CS Delta One team has created a basket of ultra-safe corporates - CSERSAFE Index on Bloomberg that relects this theme.

- Further support to our overweight of bond proxies in AAA-rated countries, such as utilities and property in the UK. The UK benefits from having its own currency, a clear plan to reduce its budget deficit and a long average maturity of government debt at 15 years.