about what S&P’s rating and outlook is on France?

Swann: Our rating on France remains ‘AAA’ and the outlook remains stable. Although the indebtedness ratios are similar between the U.S. and France, the fiscal flows are better in France.

The deficits are not as high and, again looking at the political analysis, we believe the French government has evidenced more seriousness in addressing their fiscal issues. The Sarkozy government has recently implemented both measures to raise revenues and to reduce expenditures.

They have also pushed through a politically contentious pension reform, which will both improve the long-term fiscal sustainability of the French gov- ernment and do nothing to withdraw stimulus in the near term. So we do see more seriousness in addressing fiscal issues in France than in the U.S.

Schachne: We will now hear from Laura Feinland Katz, a managing director and criteria officer, who will discuss our cri- teria and the concept of the sovereign ceiling, does that exist or not? Then we will hear from representatives from our financial institutions group to talk about banks and government-related entities (GREs), followed by bond insurers, public finance, corporate ratings, and then structured finance to wrap things up.

Laura Feinland Katz: Let’s start with the sovereigns. The first thing to say is that we do not think of the sovereign rating as a ceiling.

Yet as we are about to talk about, we have had a significant number of knock- on effects of the U.S. rating downgrade. So why is that? Well, sovereign credit risk is a key consideration for certain nonsov-

ereign ratings and that’s because of the wide-ranging powers and resources of a national government, which can affect the financial, operating, and investment envi- ronment of entities under its jurisdiction.

If you look at history, it indeed shows that a sovereign default can directly result in defaults by related borrowers as can the indirect effect of the deterioration of the economic and operating environment that is typically associated with a sover- eign default. Where we rate an entity above the sovereign, we’re making a strong statement.

We’re expressing our view that if the sov- ereign does default, there is an appreciable likelihood that the entity or sector will follow suit. Therefore our ratings criteria consider these two pieces, let’s call them the direct and indirect linkage to the sovereign, which depend on the sector as well as the individual credit characteristics of the issuer or the obligor or the transaction.

If we’re thinking about direct linkages that’s what you would expect. We’re con- sidering exposures to government securi- ties, exposures to other obligations of the government, or dependence on govern- ment guarantees or other forms of gov- ernment support. In terms of indirect linkages, we’re thinking about how dete- rioration in the local macroeconomic and operating environment would affect the sector or the entity.

If we think about how different sec- tors in the U.S. are typically affected by these direct and indirect linkages, those most affected by a sovereign downgrade would be government-related entities, or GREs. These are entities whose rat- ings benefit from direct or indirect sup- port from the government.

Similarly, entities and transactions that benefit from guarantees or credit

enhancements from the GREs or, of course, from the sovereign itself would be directly affected then. Our speakers are going to talk more about that. Next would be financial institutions or insur- ance companies, which may have both large direct exposures to U.S. govern- ment securities and indirect exposures, of course, to the effects of economic volatility and overall investment or lending portfolio deterioration.

We also consider the potential sover- eign rating, in fact, for state and local governments. There is the potential for common economic and credit environ- ments among the U.S. and state and local governments to affect the ratings. However, ratings on state, regional, or local governments can be higher than the sovereign rating if, in our opinion, the individual credit characteristics of those governments will remain stronger than those of the sovereign during times of economic or political stress.

Turning to the corporate sector, depending on the industry sector or the individual company’s financial strength, a company may be better or less able to withstand macroeconomic shocks or other country-related risks. When we think about those least exposed to sov- ereign risks, those would include the globally diversified companies or those with export orientation, those that have a low reliance on the public sector or have products with relatively inelastic domestic demand characteristics.

Finally, for securitizations, we con- sider them on a case-by-case basis, based on their exposure to direct or indirect sovereign risks.

Schachne: So that is the criteria back- ground behind the various rating actions that we did announce as a result of the downgrades. Now we’re going to start looking at those specific actions asset class by asset class. We will start with financial institutions and government-related enti- ties (GREs). Matt Albrecht from our financial institutions ratings group will talk about that asset class.

Matt Albrecht: I’ll take a look now at the direct impact the sovereign rating

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Although the indebtedness ratios are similar between the U.S. and France, the fiscal flows are better in France.