Bloomberg News

France Loses Top Rating at Moody’s in Blow to Hollande

November 20, 2012

French President Francois Hollande

Francois Hollande, France's president. Photographer: Jock Fistick/Bloomberg

France lost its top credit rating at Moody’s Investors Service, which also maintained a negative outlook for Europe’s second-largest economy, citing what it called a worsening growth outlook.

France was cut to Aa1 from Aaa, the rating company said yesterday. The Moody’s downgrade follows one by Standard & Poor’s in January and increases pressure on President Francois Hollande to find ways to bolster growth.

“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 “structural rigidities” in the longer term, Moody’s said in a statement in Frankfurt.

Since taking office in May, Hollande has pressed Germany to do more to end the European debt crisis, while focusing on tax increases at home to pare France’s budget shortfall. His government has set out 20 billion euros ($25.5 billion) in new levies on the rich and big companies that are intended to reduce the deficit to 3 percent of gross domestic product next year.

“Moody’s sanctioned the delays in France’s dealing with its debt and loss of competiveness,” Finance Minister Pierre Moscovici told reporters in Paris today. “That’s exactly the diagnosis this government has made. We see it as an invitation to pursue reforms we’ve undertaken. ”

Awkward Timing

The euro slid versus most of its 16 major counterparts after the Moody’s move renewed concern the debt crisis is deepening. The currency was 0.1 percent lower at $1.2803 as of 9:30 a.m. in Paris.

Germany, the Netherlands and Austria may face rating actions after Moody’s reiterated its negative outlooks on all sovereigns bearing the burden of bailing out troubled euro-area countries, Steven Englander, managing director of Citigroup Global Markets, wrote in a client note.

The French downgrade on growth concerns reflects an “already existing reality,” not new information for the market, he wrote.

“The timing of this sort of announcement is awkward,” said Nicolas Veron, a visiting fellow at the Peterson Institute for International Economics in Washington. “This downgrade comes a few days after announcements of structural reforms that are probably the strongest for a long time in France but it also signals that while they are ambitious the recent announcement of reforms is not enough to reassure investors that France is on the right track.”

Borrowing Costs

France was also cut one level to AA+ from AAA on Jan. 13 by Standard & Poor’s. Since then, French government bonds gained 9.4 percent as of Nov. 16, compared with 3.5 percent for Germany debt, and 2.6 percent for that of the U.S., according to Bank of America Merrill Lynch index data.

Buffeted by the European Central Bank’s offer to help finance struggling governments under certain conditions, Hollande has so far received support from his investors even after the S&P downgrade.

French borrowing costs have tumbled since he took office, with the yield on the nation’s benchmark 10-year debt dropping to a record-low of 2 percent on Aug. 3 and shorter-term notes selling at negative yields for the first time in July. French 10-year bonds yielded 2.08 percent at 9:30 a.m. in Paris.

Following the French downgrade in January, ECB President Mario Draghi said investors largely priced in the euro-area sovereign downgrades from S&P and questioned the importance of ratings companies.

Without Ratings

“I will never comment on ratings as such, but certainly one needs to ask how important are these ratings for the marketplace overall, for investors?” Draghi said Jan. 16. “We should learn to do without ratings, or at least we should learn to assess creditworthiness” with less reliance on the ratings companies, he said.

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for Standard & Poor’s. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.

Yet with an economy that has barely grown in the past year and unemployment at a 13-year high, Hollande must act quickly to address France’s lack of competitiveness by improving labor- market flexibility and lowering wage costs, economists say.

Labor Flexibility

Hollande said Sept. 9 that he wants unions and business leaders to agree on an overhaul of France’s job regulations by the end of the year or he’ll impose one himself.

“If this historic compromise is reached by year end, this reform will be given the force of law,” Hollande said on TF1 television. “But if the partners can’t agree, then I’m sorry, but then the state will assume its responsibilities.”

To aid businesses, he said this month he will raise the main sales tax rates to finance a cut in payroll charges.

Hollande has given himself a two-year window to fix the French economy, repeating pledges to reduce the deficit and hold down spending. The nation’s debt burden will peak at 91 percent of gross domestic product next year, the 2013 budget estimates.

“We expect the government to come forward with proposals on the labor market, competitiveness and the financing of the economy towards year end,” said Fabrice Montagne, an economist at Barclays in Paris. “Structural reforms are a necessity as they deliver high long-term growth per capita, ensuring that short-term fiscal slippage does not threaten debt sustainability.”

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; Meera Louis in Washington at mlouis1@bloomberg.net; Gregory Viscusi at gviscusi@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; Vidya Root at vroot@bloomberg.net


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