(Finance) – Le political difficulties in France to create a stable government after the results of the September elections have done nothing other than bring to light a public finance picture that has already been deteriorating for a long time, and now the challenge that the future government will have to face to bring the picture back to a more virtuous path of public finance is very demanding and “the risks on the horizon for next year are upwards“. The analysts write it Intesa Sanpaolo.
It is highlighted that France lost the triple A rating from all agencies in the years of the peripheral crisis and today it has a rating of AA- from the three main agencies.
The relationship between average rating (and outlook) and spread vs Bund on the 10 year maturity currently indicates one underestimation of OAT (spot 80bp) by 35bp compared to the current rating or alternatively already discounts a worsening of France’s rating by more than three notches to AA-/BBB+, with a difference compared to Italy’s rating of only approximately one notch. Italy on the (exponential) rating line is undervalued by 30bps at the current spread of 114bps, i.e. the market prices a rating on the sub-investment threshold.
“The current market pricing already largely negative compared to the current rating, it is a factor that reduces the effect of potential further downgrades of the country”, writes Chiara Manenti, Fixed Income Strategist of Intesa Sanpaolo.
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