Christian Noyer is in a bad mood. The governor of the Bank of France and member of the Governing Council of the European Central Bank has harsh words for rating agencies that may soon downgrade his sovereign. "They make threats when governments make strong and positive decisions." They are "frankly incomprehensible and irrational." And if they are going to downgrade big European nations, they should start with the U.K., "which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping."
Temper, temper. Rating agencies may well be irritating, but it is a bit late for fury. Mr. Noyer's anger now sounds like special pleading. It would ring more true if he had been almost as angry at the agencies when they kept France at the top rating despite decades of fiscal negligence. Still, he's onto something about the U.K.
Mr. Noyer's comparative analysis of France and Britain is basically fair. But he ignored the principal reason the agencies are less worried about the U.K. – monetary autonomy. The British can fairly easily call on inflation and money printing to avoid nominal default while France is stuck in the hard-money euro zone. Since the agencies basically look only at the chances of not making nominal repayments – leaving investors to calculate what those repayments are actually worth – the U.K. looks like a better bet.
The agencies' nominal perspective is what it is. They are only reflecting the views of banks and investors, who have a clear preference for real economic losses that come without writedowns over the same losses that come with the messiness of defaults. That approach is convenient but economically incomprehensible.
As far as default-by-inflation goes, the risk looks greater in the U.K. The negative real interest rate – the gap between the overnight interest rate and the current inflation rate – is twice as high on the island side of the Channel. And unless intellectual preferences change soon, the Bank of England is much less likely than the European Central Bank to push back on sustained inflationary pressure.