It has been a long time since it really made sense to say that any big sovereign deserved a triple-A rating. The top mark carries the connotation of squeaky clean and risk-free, a government that would never even think of borrowing recklessly. But well before the credit crisis showed that governments were willing to take on big debts in a hurry, obligations were mounting.
Take France. By 2007, the nation's general government debt was equal to 64 per cent of gross domestic product. That ratio is now 82 per cent. Investors have started to worry that France will follow the United States in being expelled from Standard & Poor's triple-A club. The spread on its credit default swap, calculated by Markit, has doubled to 162 basis points – higher than some non-AAA countries – since the end of June.
S&P says France's rating is stable. The agency did, and investors probably should, take comfort from last year's pension reforms and this year's joint policy document by employers and most of the unions. Unlike the U.S., where much of the fiscal debate seems unconnected to the real world, the establishment in France is well aware of what needs to be done to get the government's debts under control.
But for a decade or more, action has been much less impressive than analysis. Also, euro zone solidarity is likely to be costly for France as well as for triple-A-rated Germany. And France, like the U.S. and indeed Germany, has borrowed too much in good times and prepared too little for the great aging of its population.
Worries about France's rating are justified, but investors should spread their concern wider. Years of monetary stimulus and the global expansion of leverage have made everything in finance risky. Agencies must grade on a curve, and money must flow to the safest credit available. Triple-A, like top marks in school, is just not what it used to be.
The Lex team