Moody's Downgrades France To AA1, Following S&P Downgrade In January

Zut Alors! France Loses Second AAA Credit Rating

France's credit rating was cut by Moody's on 19 November, following a similar move in January by Standard & Poors.

Moody's cut from AAA to AA1 was expected by the world's markets, but will be seen as a further blow to France's economic policies and the government headed by François Hollande.

The ratings agency had waited until it had seen Hollande's new economic plan, but remained sufficiently unimpressed to downgrade its rating.

France's public debt level stands at more than 90% of its gross domestic product and the country is struggling to find ways to generate growth.

Moody's cited an uncertain fiscal outlook and a weakening economy as reasons for its cut, adding that France's fundamentals - such as high labour charges, poor performing exports and “sustained loss of competitiveness” - were concerning.

Lee McDarby, analyst at Investec Corporate Treasury, said it wasn't all bleak news however.

French borrowing costs have reduced significantly since the European Central Bank offered to help finance struggling nations, resulting in its 10-year debt dropping to a record low 2% and shorter term notes selling at negative yields for the first time during the summer - which will help put coppers back in the French government's purse.

"Nevertheless, investors will continue to closely monitor developments for any further signs that contagion is spreading from the periphery into 'core' countries," Darby continued.

"Recent GDP releases have seen GDP of countries such as Austria and the Netherlands shrink, with signs that the downturn is intensifying into the final months of the year."

Analysts at Lombard Odier said the main problem was how France was dealing with its austerity measures - cutting back spending would be better as it wouldn't hit outputs as much as tax-based cuts, but so far, France is favouring tax changes to spending cuts.

Of the 30 billion euro savings France is planning to make, two-thirds of the savings are coming from what economists call higher tax receipts, with just a third coming from spending cuts.

Lombard Odier explained in a note to investors that since production and import taxes had fallen in the past 50 years, there was a desperate need to make French industry more competitive - such as by lowering corporation taxes.

And although some business tax rates are to be introduced, applying them over three years instead of just one or two wouldn't provide the urgency needed to help generate growth.

France appears to be unconcerned about the downgrade - finance minister Pierre Moscovici told a news conference: "The rating change does not call into question the economic fundamentals of our country, the efforts undertaken by the government or our creditworthiness."

Fitch Ratings, the third major ratings agency still has France at AAA, but with a negative outlook.

The loss of its AAA rating from two agencies poses a problem for France, as investment funds often require their best assets to have at least two top notch ratings to remain in their portfolios.

But our sister title Le Huffington Post responded to the news by drawing up a list of benefits that France may gain after the loss of the AAA ratings, pointing out that despite the downgrade, its markets have not collapsed.


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