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Last updated: November 19, 2012 11:51 pm
France suffered the second downgrade of its sovereign debt rating this year when Moody’s, the US rating agency, removed its triple A ranking on Monday night.
It followed a similar move in January by Standard & Poor’s and underscored concerns that the country’s high level of public debt, which has risen above 90 per cent of gross national product, put it in danger of becoming another victim of the eurozone debt crisis.
The move will pose a serious test for François Hollande’s socialist administration, in office for only six months. But the government was braced for the decision, which was flagged as early as February when Moody’s put France on negative outlook – which it maintained on Monday night. The third major agency, Fitch, still ranks France as triple A.
Moody’s said it was downgrading France by one notch to Aa1 because of its “multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets”.
It added that the country’s fiscal outlook was “uncertain” and its ability to resist “future euro area shocks” was diminishing.
It said France’s exposure to peripheral eurozone countries hit by the crisis through its trade links and its banking system was “disproportionately large, and its contingent obligations to support other euro area members have been increasing”.
Dietmar Hornung, senior credit officer for the Sovereign Group at Moody’s, said the continued negative outlook on France reflected how the country was “tilted to a lower rating” over the next 12 to 18 months.
He said a further downgrade was not out of the question should France experience further deterioration in its economy, difficulties in implementing recently announced structural reforms or an escalation of the eurozone crisis.
Pierre Moscovici, the finance minister, said the downgrade was a “sanction on the past” – laying the blame on the previous centre-right government of Nicolas Sarkozy.
He said the move should be accepted with calm and would spur the government to push through the reforms it has announced to reduce the budget deficit to 3 per cent of GDP next year and tackle the issue of France’s declining competitiveness.
Moody’s acknowledged the government’s “strong commitment to structural reforms and fiscal consolidation”. But it said recent measures were insufficient and added: “The track record of successive French governments in effecting such measures over the past two decades has been poor.”
Reforms promised by the government include a package of measures announced earlier this month to reduce labour costs for employers by €20bn and boost investment, and talks underway between employers and trade unions on some relaxation of the country’s highly restrictive labour market regulations.
Although the loss of its triple-A ranking by S&P in January was much feared by the previous government, France has nonetheless gone on to enjoy record low sovereign borrowing costs this year, placing some short-term lending at negative interest rates.
Attention will now focus on whether the Moody’s decision will cause a significant reversal of this trend, potentially threatening to upset the delicate state of the country’s public finances. The government’s 2013 budget projects an average cost of borrowing for 10 year bonds of 2.9 per cent next year, compared with its current rate of 2.2 per cent.
Additional reporting by Michael MacKenzie in New York
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