E.U. Bailout Promise Poses "AAA" Ratings Question for France & Germany

Germany’s Angela Merkel and France’s Nicolas Sarkozy announced some loose plans that would save European banks.  The notion that no formal debt rescue plans.  The two noted on Sunday that a comprehensive plan to resolve the debt crisis will be finalized and released by the end of this month.  Unfortunately there is a twist here with the debt ratings agencies.

Moody’s has said today that it sees only a “limited impact” on France’s “Aaa” rating (with a stable outlook) based upon the Dexia bailout.  The question for us was never just over Dexia.  The question is how much it will take to backstop the debt from 5 or 10 more banks that are even larger than Dexia.  It is that which will be the true ratings agency test in the months ahead.

We recently showed which nations were also at risk of losing their “AAA” ratings after the United States rating was downgraded.  France was more at risk than Germany.  This was also before the debt drag in Europe took hold all over again.  We noted, “With France being a key guarantor in the EU and the woes of the PIIGS nations, France could easily find itself at-risk of losing its the triple-A rating. Its banks also own substantial U.S. debt. We still view the debt rating risks more harshly than the ratings agencies on a longer-term basis.”

One of the reasons that neither Germany nor France would want to immediately release a capitalization plan is because the governments have to weigh on how much help they can really offer before it becomes an actionable event by the ratings agencies.  It may be sad, but this only makes sense.

If an indefinite support package is announced, something that seems unlikely, then the ratings agencies may view that at least France has taken on an endless liability.  A couple of weeks will give the central banks time to discuss potential backstop packages so that France (and/or Germany) would not jeopardize the prized “AAA” ratings.

The equity market participants are begging for the Europeans to help.  It has taken far too long for a hint of a response, but it has at least now finally been delivered.  The ratings game for the “AAA” may be the biggest hurdle to how much France and Germany can truly offer.  It would seem logical that France and Germany will offer assistance a bit shy of where the ratings agencies determine would be a credit event.