France recently lost its AAA credit rating as Moody’s Investor Services lowered the country’s credit rating based on what they said was a worsening economic outlook. The yield on France’s 10-year bonds climbed eight basis points. The downgrade did not set off a panic of any kind anywhere. Greek, Spanish and Italy bonds are all quiet, as are US and German bonds. There was no flight from France to other markets, nor was there a running away from France.
I bring this up because many people seem convinced that the U.S. will suffer greatly if the U.S. loses its AAA credit rating from Moody’s. The lesson from France is that it might cost us a few basis points, but that is about it. No cataclysmic fall out, no dumping of Treasuries, no difficulty selling bonds. The media may exaggerate the fear and talk ad nauseam about how bad this would be, but history and France suggest that it is a fairly minor event.
