France Loses AAA Credit Rating


Credit rating agency Moody’s Investors Service has downgraded France’s sovereign debt rating by a single notch from triple-A to Aa1, citing concerns over Paris’ competitive decline as well as persistent structural rigidities and market inefficiencies.  

In addition to the downgrade, the agency said France’s outlook remains negative, which means further downgrades are possible.

The Moody’s downgrade follows a similar decision by Standard and Poor’s in January and increases the pressure on President Francois Hollande, who is pushing for economic reforms amid a protracted eurozone debt crisis.

In a statement, Moody’s explained its rationale for the rating downgrade:

The first driver underlying Moody's one-notch downgrade of France's sovereign rating is the risk to economic growth, and therefore to the government's finances, posed by the country's persistent structural economic challenges. These include the rigidities in labour and services markets, and low levels of innovation, which continue to drive France's gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base.

Nicolas Veron, a visiting fellow at the Peterson Institute for International Economics in Washington, told Bloomberg that the announcement comes at an “awkward” time, as “this comes a few days after announcements of structural reforms that are probably the strongest for a long time in France”

Since taking office in May, Hollande has demonstrated an aversion to austerity and instead targeted the rich in a tax plan that is meant to pare France’s budget shortfall and reduce the deficit to 3 percent of gross domestic product by next year.

Earlier this month, France also announced some 20 billion euros ($25.7 billion) worth of annual tax credits as a way of boosting the country’s economic competitiveness.

Related News: France Announces €20bn Tax Break for Businesses

Related News: Hollande Targets the Rich in a €7bn Tax Plan

Moody’s said it acknowledges the remedial steps taken to address France’s structural challenges and reduce its deficit to 0.3 percent of GDP by 2017, but added that “those measures alone are unlikely to be sufficiently far-reaching to restore competitiveness, and Moody’s notes that the track record of successive French governments in effecting such measures over the past two decades has been poor.

In a special report published on Saturday, The Economist described France as the “biggest danger to Europe’s single currency” and said the fifth-largest world economy is now a “time-bomb at the heart of Europe.”

“French firms are burdened by overly rigid labour- and product-market regulation, exceptionally high taxes and the eurozone’s heaviest social charges on payrolls. Not surprisingly, new companies are rare. France has fewer small and medium-sized enterprises, today’s engines of job growth, than Germany, Italy or Britain. The economy is stagnant, may tip into recession this quarter and will barely grow next year. Over 10 percent of the workforce, and over 25 percent of the young, are jobless,” The Economist wrote.

“The external current-account deficit has swung from a small surplus in 1999 into one of the eurozone’s biggest deficits. In short, too many of France’s firms are uncompetitive and the country’s bloated government is living beyond its means.

They warned:

So far investors have been indulgent of France; indeed, long-term interest rates have fallen a bit. But sooner or later the centime will drop. You cannot defy economics for long.

Related News: France Insists It Is Not the “Sick Man of Europe”