The Market View: France more like Indonesia (BBB) than the UK (AAA)

by Henry_Gruijters on February 15, 2012

We often listen to central authority. The rating agency, are the authority on credit worthiness. They are currently slapping governments on the wrist. Much attention has been devoted to challenging the rating agencies. Sarkozy has even commented that France is in a better state than the British economy . Furthermore he and seems obsessed with a flawed Tobin Tax. In reallity France may be more like Indonesia (BBB) than the UK.

Do you trust the ratings agencies? If the answer is no! It is insightful to look at the opinion of the dispersed knowledge of the CDS market. In the market investors put money where the rating agencies just have their reputation; those investors who know best will make money. These graphs illustrate that the current market believes that the UK is in a better state than France, Germany and The Netherlands.

UK outperforms EU Peers

This blog will not go into the calculations of the implied probability of default, this and far morecan be found on the Deutsche Bank Research website. The prices of CDS (bond insurance) is determined by the market. It is therefore interesting to see if the opinion of many market participants varies greatly from the rating agencies.

Yesterday Moody’s warned that both the UK and France might be downgraded. The market, however, believes that the probability of default differs greatly between the UK and France (as can be seen in the first graph). Amongst fellow AAA rated countries the UK performs rather well with lower implied probability of default than Germany and The Netherlands. France on the other hand performs badly and has a similar implied probability of default as Thailand (A-), Indonesia (BBB-) and The Philippines (BB). It would not be surprising to see these countries who have managed there public debt well recently, upgraded and to see France downgraded in the near future.