What would be the consequences in the event of France’s rating downgrade

►   The end of 2025 will be marked by the review of France's sovereign rating by the major rating agencies. The negative outlook set by Fitch and S&P has primarily been justified by deteriorating French public finances and political uncertainties. The likelihood of a downgrade will therefore largely depend on how well macroeconomic performance aligns with the agencies' scenarios, as well as political (in)stability.►   Rates: The current relative value of OATs vs. their EGB counterparts suggests that the risk of a downgrade is already priced in. A downgrade from AA- to A+ would not have major implications from a regulatory perspective, but some non-resident investors may have a lower appetite for French debt or demand higher yields.►   ECB toolkit: One of the main concerns relates to the risk of spillover effects on other Euro area sovereign bonds. Our view is that the extensive range of instruments will enable the ECB to respond appropriately to any shocks that may undermine the transmission of the monetary policy stance along the yield curve►   € Credit Indices are significantly exposed to France, between 16% and 37% of iBoxx indices. In particular, French banks and insurers account for more than 25% of their respective iBoxx indices, all the more as their spreads display higher sensitivities to OAT spreads volatility than their corporates counterparts.►   Banks have a « natural » sensitivity to sovereign risk putting French banks at the center of the current wave of uncertainties surround the French Sovereign. Implications for French banks are twofold as ratings are again under scrutiny and spreads have been facing some pressure.►   French covered bond programmes should be able to maintain their ratings in the event of a potential downgrade of France by the three major rating agencies, as long as the overcollateralization is consistent with the AAA rating.►   Most French insurers are expected to maintain their ratings unaffected in the event of a downgrade of France's credit rating.►   French real estate has been deeply impacted by the French political crisis, increasing risk premiums, mainly affecting office and homebuilding sectors.