How significant is the downgrade of France by Standard & Poor’s?
According to some commenters, like the WSJ’s Simon Nixon, not that significant.
But one market which could very well feel an impact it turns out is the repo market. And it’s all down to the use of French bonds in tri-party repo deals.
The WSJ’s MarketBeat, for example, brings us this interesting comment from J.P. Morgan’s Nikolaos Panigirtzoglou:
In repo markets the major risk from AAA country downgrades is with tri-party repo agreements. As we argued before, a large part of tri-party agreements in Europe are classified first by rating, then by type of issuer and then by country of issue. So a tri-party agreement that currently takes French government bonds as collateral, would have AAA accepted, then Sovereign issuers and then France. If France no longer had the minimum AAA rating (Euroclear defines the rating as the lowest of the two, Moody’s and S&P), French government bonds would not be eligible anymore.
How big is the tri-party repo universe? According to ICMA’s repo survey, European tri-party repo is a €340bn universe. Of that, around half or €170bn is with AAA collateral. Of that €170bn, Germany accounts for around €70bn, France for €30bn and UK for another €30bn. So if France is downgraded, around €30bn of tri-party repos will be affected. Admittedly, this represents an upper bound of the amount of repos that are likely to be immediately affected, as not all tri-party agreements have strict AAA requirements.
Just something to keep in mind.