Could another France downgrade put the EU’s credit rating at risk?

Investing.com reports that further downgrades of France's sovereign credit rating are unlikely to jeopardize the European Union's overall creditworthiness, according to a recent UBS research report. The analysts explained that France's deteriorating credit profile would not automatically lead to an EU downgrade, thanks to the diversification of support among member states and variations in rating agency methods.

This assessment comes in the run-up to Moody's scheduled review of France on October 23rd. Currently, France's credit rating stands at Aa3 with a negative outlook, while the EU is rated Aaa by Moody's, AAA by Fitch, and AA+ by S&P, all with stable outlooks. For UBS, France would need to drop to Baa3 under Moody's criteria or BBB under S&P's before its decline would directly impact the EU's weighted-average assessment of member-state credit quality.

Fitch's methodology adds an extra layer of protection, as France is not included in the AAA-rated countries that underpin the EU's creditworthiness. Instead, Germany emerges as a more significant potential risk, especially if weakening sovereign ratings diminish the capacity of highly rated member states to cover EU debt obligations.

The analysts also emphasized that the European Commission possesses safeguards enabling it to request additional contributions from other member states if a country fails to meet its obligations, although these mechanisms have not been tested. Beyond sovereign ratings, political opposition to further European fiscal integration poses a longer-term concern.

The report notes proposals in France to curtail EU budget contributions and mounting resistance in Germany to additional joint borrowing. However, existing budget commitments offer some protection against abrupt funding changes. The analysts concluded that political resistance could potentially curb the growth and stability of the EU bond market without necessarily compromising the creditworthiness of outstanding debt.