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Moody’s downgrades France’s credit rating

20 Nov 12
France has lost its triple-A credit rating with Moody’s due to uncertainty over its ability to achieve economic growth and cut its debt

By Nick Mann | 20 November 2012

France has lost its triple-A credit rating with Moody’s due to uncertainty over its ability to achieve economic growth and cut its debt.

The ratings agency downgraded France by one notch to Aa1 and maintained its negative outlook for the economy. It said the long-term growth outlook was adversely affected by the country’s sustained loss of competitiveness and historically rigid labour, goods and service markets.

These ‘structural rigidities’ contributed to an uncertain fiscal outlook, which was also being hampered in the short term by subdued domestic and external demand.

Moody’s also raised concerns over France’s ‘diminishing’ ability to weather future shocks in the eurozone, saying it was hampered by its ‘disproportionately large’ exposure to the peripheral European countries worst hit by the crisis.

Although France had taken steps to address the structural weaknesses, these measures were unlikely to be far-reaching enough to make the economy competitive again, Moody’s said.

‘Moody’s notes that the track record of successive French governments in effecting such measures over the past two decades has been poor,’ it explained.

Similar concerns were raised over its potential to successively implement fiscal consolidation measures. The French government’s estimates for gross domestic product growth of 0.8% next year and 2% from 2014 onwards were ‘overly optimistic’ and there was a continued risk of ‘fiscal slippage’ and more austerity measures being needed, it said.

‘On top of rising unemployment, France's consumption levels are being weighed down by tax increases, subdued disposable income growth and a correction in the housing market,’ Moody’s explained. ‘Net exports are unlikely to drive economic activity in light of reduced external demand, in particular from euro area trading partners such as Italy and Spain.’

It added: ‘Based on the track record of successive governments in implementing fiscal consolidation measures, Moody's will remain cautious when assessing whether the consolidation effort is sufficiently deep and sustained.’

France did receive praise for its ‘large and diversified’ economy and the government’s ‘strong commitment’ to structural reforms and fiscal consolidation.

But, the ‘substantial’ risks to these planned reforms meant Moody’s maintained its negative outlook on the country’s credit rating. This outlook also mirrors those of the other eurozone nations likely to bear the brunt of paying for any further bailout of a member of the single currency, it noted

Moody’s move follows Standard & Poor’s downgrade by one notch in January, leaving Fitch the only major ratings agency to maintain a triple-A rating for France.

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