France’s Credit Rating Downgraded to AA by S&P

France, which lost its AAA credit rating from Standard & Poor’s (S&P) in January 2012, has been further downgraded from AA+ to AA by the credit ratings agency (CRA).

S&P said its latest downgrade reflected the French government’s current policy initiatives, which appeared inadequate in addressing impediments to economic growth.

“We believe the French government’s reforms to taxation, as well as to product, services, and labour markets, will not substantially raise France’s medium-term growth prospects, and that ongoing high unemployment is weakening support for further significant fiscal and structural policy measures,” the CRA announced.

S&P added that the outlook for the rating was ‘stable’, reflecting its expectation that the government of President François Hollande would hold debt in check. It estimates that France’s debt will peak in 2015 at 86% of gross domestic product (GDP).

While France’s economy expanded by 0.5% in the second quarter of 2013 from Q1, to give an annualised rate of about 2%, the country’s unemployment rate of 11.1% is restricting growth and its efforts to reduce deficit spending that are mandated under European Union (EU) rules.

Pierre Moscovici, the French finance minister, responded that he ‘regrets’ S&P’s ‘critical and inaccurate judgment’. “Never has a government carried out so many reforms in such a short time and in such a difficult economic environment,” he added.

The downgrade came shortly after the European Central Bank’s (ECB) unexpected decision to cut the benchmark interest rate for the eurozone from 0.50% to 0.25%, on fears that inflation in the region has declined to levels that could be a harbinger of deflation.

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