France faces a slew of key sovereign debt rating reviews from next week, with the risk of a downgrade rising as the government, which looks set to lose a confidence vote on Monday, struggles to gain backing for an unpopular debt-cutting plan.
While France's rating was downgraded by Moody's after its previous government collapsed last year, a repeat would be a heavier blow, pushing it to a lower rating category and raising the risk of forced selling of its already pressured bonds.
Citi senior European rates strategist Aman Bansal is among analysts who think the confidence vote increases the risk of a downgrade.
"If the government fails a confidence vote linked to the need for fiscal tightening, that would go towards the point that there is little electoral or political appetite for fiscal austerity."
Even if the government survives, France's struggle to rein in its debt means the risk of an eventual downgrade will likely remain, with two of the "big three" agencies already holding a negative outlook on their French sovereign ratings.
Fitch, often seen as a first mover among the agencies, reviews its AA- rating with a negative outlook on September 12. Moody's and S&P Global, which have equivalent ratings, follow in October and November.
A Fitch downgrade would push France's rating to A+, seven notches above junk territory and the lowest among peers.
The biggest risk is a downgrade if a government collapse throws into doubt France's deficit-reduction plan and if Fitch sees that as confirming its negative outlook, said Danske Bank chief analyst Jens Peter Soerensen, noting the agency had taken a tough stance in downgrading Finland and Austria recently.
But Barclays' head of euro rates strategy Rohan Khanna said downgrading a borrower into a new rating category was usually harder.
"Doing that for Europe's second-largest economy is not going to be a very easy thing," he said, adding that the appointment of a new prime minister would make ratings moves less likely.
Morgan Stanley agreed that it may be too early for a Fitch downgrade given already downbeat expectations.
Fitch's March review already forecast a 5.6% deficit next year, much higher than the government's 4.6% target, and said an election was likely this year.
Bankers in Paris this week said the political turmoil had injected fresh uncertainty into dealmaking, unnerving corporate executives and denting France's appeal as an investment destination.
But they also noted stocks had not fallen as much as they did last year after President Emmanuel Macron called a surprise snap election.
FORCED SELLING?
Analysts say rating agencies are slow movers and France's debt already reflects lower ratings, paying higher yields than lower-rated Spain and Greece and close to paying more than even lower-rated Italy.
While that may limit the market impact, a downgrade to a new rating category risks forced selling and may require investors to put aside more capital to hold French bonds, analysts said.
Investment mandates with ratings restrictions usually set thresholds at the bottom of a rating category, so funds requiring a double A rating or higher would need to sell, though that would usually require at least two separate downgrades.
There is little data available to quantify how much forced selling would follow, making it difficult to estimate its impact, analysts added.
The risk is also that investors who focus on higher-quality assets, like central banks and pension funds, sell some of their holdings.
Jefferies economist Mohit Kumar said such investors he has talked with have criteria on how much they can invest in each rating category.
That means they would reduce their holdings if France is downgraded to single A by two agencies, though this would take several months as it would need to be decided at their investment committees, Kumar said.
