Embattled France takes another blow with a ratings downgrade

November 20, 2012
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November 20, 2012
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More turmoil for FranceAP Images / Christophe Ena

Moody’s rating agency yesterday downgraded France’s government bond rating to Aa1 from Aaa, while maintaining a negative outlook. The news was largely expected following a similar move by Standard and Poor’s in January and an announcement by Moody’s in February that it would assess France given the uncertainties in the euro zone.

Moody’s explained the decision by pointing to “persistent structural economic challenges” such as rigid labor and services markets, and low levels of innovation, which undermine economic growth and ultimately the government’s finances.

The news comes despite attempts by Francois Hollande’s Socialist government to spur competitiveness by helping firms cut labor costs through billions in tax breaks. The second downgrade this year by a ratings agency could drive up borrowing costs in France as investors who are required to have at least two top-notch ratings on their best assets are forced to move on.

Here are other key reasons for the decision:

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 structural rigidities noted above.

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.

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