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Downgrade Downer: France Angry at Credit Rating Gaffe

The French finance minister has reacted angrily to a credit-rating gaffe by Standard and Poor's. The agency accidentally sent out an email suggesting that France had lost its triple-A rating. Many are asking how the firm could have made such an embarrassing slip-up at a time when markets are especially jittery.

The Paris business district La Defense: France is not happy about the downgrade gaffe. Zoom
AP

The Paris business district La Defense: France is not happy about the downgrade gaffe.

First Greece, then Italy and now France? That, it would seem, was the message of an email erroneously sent out by Standard & Poor's to several of its customers on Thursday. According to the message's subject line, France had lost its AAA rating -- an eventuality which could plunge the country into the kind of difficulties currently being experienced in Italy. It was only one-and-a-half hours later that the mistake was corrected.

According to a statement by S&P, a technical glitch resulted in the automatic message being sent to subscribers of its Internet site Global Credit Portal saying that France's rating had been changed. S&P emphasized that this was not the case and that France was retaining its AAA rating with a stable outlook. The company said that anyone who clicked on the link in the email, which featured the subject line "DOWNGRADE," would have seen that France's rating had not changed.

The New York Stock Exchange temporarily fell as a result and yields on French 10-year sovereign bonds jumped 27 base points to 3.46 percent. The euro also lost ground against the dollar.

'Shocking' Mistake

French Finance Minister François Baroin called the mistake "shocking" and demanded an immediate investigation into the incident by European and French regulators. The French stock-market regulator AMF reacted by launching an investigation. The European Union regulator ESMA and the US Securities and Exchange Commission are also expected to look into the incident.

The gaffe could hardly have happened at a worse time. In recent weeks there has been speculation that France could lose its AAA rating as a result of French banks' exposure to Greek debt. In mid-October, Moody's had warned that the country's AAA rating could be in jeopardy unless the government made an effort to get its finances under control during the next three months. Furthermore, market nerves are particularly frayed at the moment given uncertainty over the political situation in Greece and the risk that the euro crisis could engulf Italy, the third-biggest euro-zone economy. For French President Nicolas Sarkozy, who is running for reelection next year, it is vitally important that France keep its triple-A rating.

"Can you believe this?" one unnamed French official told the Financial Times. "This is not going to please people. … In the situation we are in at the moment, you can't play around like this."

"This was the first day when we got the feeling that France could be infected by the crisis," a French trader told the newspaper Le Nouvel Observateur, referring to the fact that French bond yields had jumped by over 25 percentage points.

"Given how important these sovereign ratings have become and how on edge markets are, for S&P to accidentally send out a note like this borders on comical," said Michael Church, head of an investment-management firm, in remarks to the Wall Street Journal.

Criticism of Big Three

One former S&P analyst told the Wall Street Journal that the fact that an alert was ready in the system suggested that the rating agency could be in the middle of a review of France's creditworthiness.

The gaffe came on a day when the European Commission had forecast that the French economy would only grow by 0.6 percent in 2012 and urged France to take further steps to make sure its budget deficit gets under the EU limit of 3 percent of gross domestic product in 2013. Finance Minister Baroin insisted that the country was already doing enough to cut its deficit, however.

The incident is unlikely to improve the reputation of the "big three" rating agencies. Many European politicians have accused S&P, Moody's and Fitch of exacerbating Europe's debt crisis through their downgrades, and there have been repeated calls for the current rating-agency system to be reformed.

In October, S&P downgraded Spain to AA- from AA. The country was also downgraded by Moody's and Fitch. In September, the big three had previously downgraded Italy. S&P currently gives the country an A rating.

dgs -- with wire reports

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1. what mistake!! credit-rating gaffe by Standard and Poor's.
neboway 11/13/2011
when are those credit agencies going to get stopped by the governments , it was said previously that credits agencies are only doing their jobs by reporting how a country is doing / or not doing with its financial health , good ,great , applause , or the contrary , , but when and whom appointed them to be the political wisdom keepers of countries I. E. Italy or Greece or others , since when do they prophesies the futures of governments if they're going to pass or not pass such and such financial measures , or better still why not stick to what is or is not the financial positions at present instead of speculating what a government should do , I think we should disband them or constrain them within a new rule of law that stops this , " do this or we'll down grade you " as for the mistake re. the French AAA rating , was it an intentional mistake ,, because we are the market makers,, and we have to lead or give the impression that we lead the markets , or is it simply the new American way of doing things " i'll do or say anything i like , make an impact and then come back with a " i am sorry , i Apologise for what i said or done " " oh did you just said that it's too late the horse has bolted ,, oohh geee's sorry about that !!!
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How the Rating Agencies Work
The Agencies
The rating agencies assess and value the credit-worthiness, or ability to pay back a loan, of companies, banks and states. In doing so, the agencies publish ratings as well as assessments of business sectors and management reviews. The most influential rating agencies are Standard & Poor's (S&P), Moody's and Fitch, which are known as the "big three."
The Meaning of a Rating
The worse the bonds of a market participant are rated, the more expensive and difficult it is for them to borrow money. The cost of refinancing rises and, in a worst-case scenario, lenders may withdraw their investments. Banks and institutional investors, among others, rely on credit ratings to determine who they should lend money to.
The Ratings
Agencies use letter codes to classify their ratings. Standard & Poor's and Fitch, for instance, issue a top rating of AAA. This is followed by ratings of AA, A, BBB, BB, B, CCC, CC and C. Most ratings have sublevels denoted by a plus or minus sign. BB+, Greece's current rating by S&P, is the highest speculative rating, a risky bet, and commonly referred to as "junk." Junk ratings descend to D, which denotes that a borrower is in default, or failure.
Criticism
Critics of the ratings system complain that it's often unclear how much weight mathematics, on the one hand, and opinion, on the other, are given when determining a credit rating. During the recent financial crisis, credit agencies were pilloried because they rated junk securities as safe investments. According to one risk-management firm, more than nine in 10 mortgages that were rated AAA in 2007 are now considered junk.
The Ticking Euro Bomb


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