France stripped of AAA rating

News - Economy

Tuesday, 20 November 2012 15:34

France was stripped of its gold-standard AAA credit rating last night after credit rating agency Moody's suggested its growth prospects would be hit by a lack of competitiveness and an inflexible labour market.

Moody's also warned that France’s ability to absorb shocks created by the ongoing eurozone crisis was becoming less predictable and said its exposure to riskier eurozone countries including Spain and Greece was disproportionately high.

The ratings agency said: “Further shocks to sovereign and bank credit markets would further undermine financial and economic stability in France as well as in other euro area countries.

“The impact of such shocks would be expected to be felt disproportionately by more highly indebted governments such as France.”

Moody’s is the second ratings agency to downgrade France after Standard and Poor’s lowered the country’s rating earlier this year.

Ratings downgrades have had little effect on the borrowing costs or sovereign bond yields for countries such as USA and Pierre Moscovici, France's finance minister, implied he was not worried yields would rise.

"Moodys is now giving France the same rating as Standard & Poor's, which has allowed us to live with low interest rates for many months," he said.

But Stephanie Kretz, from the investment strategy team for private banking at Lombard Odier, said the current “French bashing” as France’s economic and finance minister Pierre Moscovici termed it might not be “absurd and unfounded”.

She said: “Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones and, unfortunately, the French budget takes the latter approach.

“We doubt that the French approach, which lacks growth-oriented structural reforms and concentrates on higher direct taxes rather than indirect taxes or spending control, will achieve its deficit reduction goal.”

And Kretz added: “Given France’s gross debt-to-GDP ratio of 105.5% and unconvincing budget, any loss of confidence could be the trigger for a rapid rise in yields.”