The head of the Bank of France suggests that before reducing France's AAA rating, agencies should consider downgrading the UK. But has pride gone before a falling French rating?
As the eurozone crisis continues to intensify, national tensions are being revealed and insults are starting to fly. But while we may be resigned to politicians occasionally throwing mud at each other, it is not something we should expect from our central bankers.
It was disappointing then, when Christian Noyer, head of the Bank of France (BoF) and member of the European Central Bank (ECB), announced in an interview, that if France was going to be downgraded by the ratings agencies, they should first downgrade the UK, “which has bigger deficits, more debt, higher inflation, less growth than us, and where credit is shrinking”.
The first concern arising from Monsieur Noyer’s unfortunate comment is that it suggests he fails to acknowledge that a rating agency’s decision is not based simply on the criteria he points to, but the ability of the sovereign in question to use interest rates and monetary easing as policy tools, a luxury not extended to the eurozone sovereigns in question.
Moreover, it suggests that Mr Noyer is being a little disingenuous. He refers to the deteriorating state of UK credit conditions but turns a blind eye to unfolding conditions in France. With access to funding markets greatly reduced, French banks have been forced to drastically increase borrowing from the ECB: BoF’s own figures show their total borrowings in October 2011 (the latest BoF data available) to be €158.5bn, more than double the €69.8bn borrowed in August. By contrast, total UK bank borrowings from the Bank of England for December 2011 stood at £12.6bn (€15bn).
And with the European Banking Authority stress tests revealing that French banks have a €7.3bn capital shortfall (versus no shortfall in the UK), one has to assume that French banks will be unwilling to grow their balance sheets any time soon, which means, next year, France may also face a shrinking credit environment.
More importantly, however, we should be worried that a central banker is letting national pride and not a little emotion influence his public behaviour. It is not the role of technocrats to suggest that any other country or entity should be downgraded. And this kind of inflammatory comment must surely breach the etiquette of the central bankers club.
History has shown that central bankers must remain neutral or risk distorting the financial ecosystem. Alan Greenspan approached his role as chairman of the Federal Reserve with more than technocratic expertise; he applied an ideology – his faith in free markets – to the role, and this made him blind to the dangerous imbalances building in the system.
We have to keep politics and emotion out of central banks.
