Moody’s Investors Service has downgraded France’s government bond rating by one notch to Aa1 from Aaa and said the outlook remains negative. Its action follows a similar downgradeby fellow credit ratings agency (CRA) Standard & Poor’s (S&P) in January this year.
Moody’s added that the action follows its decision on 23 July 2012 to change to negative the outlooks on the Aaa ratings of Germany, Luxembourg and the Netherlands. At the time, it also announced that it would assess France’s Aaa sovereign rating and its outlook, which had been changed to negative on 13 February 2012, to determine the impact of the elevated risk of a Greek exit from the euro area, the growing likelihood of collective support for other euro area sovereigns and stalled economic growth. The rating action concludes this assessment.
The CRA said that its decision to downgrade France’s rating and maintain the negative outlook reflects the following key interrelated factors:
- France’s long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets.
- France’s fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand, and in the longer term due to the same structural rigidities.
- The predictability of France’s resilience to future euro area shocks is diminishing in view of the rising risks to economic growth, fiscal performance and cost of funding. France’s exposure to peripheral Europe through its trade linkages and its banking system is disproportionately large, and its contingent obligations to support other euro area members have been increasing. Moreover, unlike other non-euro area sovereigns that carry similarly high ratings, France does not have access to a national central bank for the financing of its debt in the event of a market disruption.
At the same time, Moody’s said that France remains extremely highly rated, at Aa1, because of the country’s significant credit strengths, which include:
- A large and diversified economy which underpins France’s economic resiliency.
- A strong commitment to structural reforms and fiscal consolidation, as reflected in recent governmental announcements, which may, over the medium term, mitigate some of the structural rigidities and improve France’s debt dynamics.
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. The second is the elevated uncertainty with respect to France’s fiscal outlook. Moody’s acknowledges that the government’s budget forecasts target a reduction in the headline deficit to 0.3% of gross domestic product (GDP) by 2017 and a balancing of the structural deficit by 2016. However, the CRA considers the GDP growth assumptions of 0.8% in 2013 and 2.0% from 2014 onwards to be overly optimistic.
The third rating driver of Moody’s downgrade is the diminishing predictability of the country’s resilience to future euro area shocks in view of the rising risks to economic growth, fiscal performance and cost of funding. In this context, France is disproportionately exposed to peripheral European countries such as Italy through its trade linkages and its banking system. Moody’s notes that French banks have sizable exposures to some weaker euro area countries.
Moody’s decision to maintain a negative outlook on France’s government bond rating reflects the weak macroeconomic environment, and the CRA’s view that the risks to the implementation of the government’s
planned reforms remain substantial.
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