Downgrading of France’s sovereign rating: would it have a real impact or would it just be a storm in a teacup?

Fitch and Moody’s are due to review the France ’ s credit rating this Friday after the European close, while an update from S&P is scheduled for 31 May . The market has already reacted to bad news on the French public accounts. In our central scenario (with negative action by Moody's and a downgrade by S&P) we believe that the 10-year OAT-Bund spread will remain influenced first and foremost by risk appetite and monetary policy expectations from the ECB and the Fed. Action by the two rating agencies could create a gap, but this would be limited. French banks exposure to French sovereigns amounting to around €584bn , and 64% of sovereign portfolio are measured at amortised costs , which would limit the volatility in banks’ capital in the event of a widening of sovereign spreads . In the short term, the impact of a downgrade of France’s sovereign rating on the domestic banking sector seems fairly limite d . La Banque Postale could therefore be downgraded by one notch at S&P in the event of a downgrade of La Poste followed by a downgrade of France’s sovereign rating . The only covered bond programme affected by an eventual one-notch downgrade of France’s sovereign rating would be the CAFFIL programme rated by S&P French insurers hold more than €300bn of French sovereigns. A widening of sovereign spreads would have a very limited impact on French insurers’ solvency . The impact of a downgrade of France’s sovereign rating on French insurers’ ratings is limited in the short term. The S&P rating of CNP Assurances could be downgraded in the event of a downgrade of La Poste’ rating following a downgrade of France.