Bloomberg News

France Loses Top Credit Rating as Fitch Cites Lack of Growth

July 12, 2013

France lost its top credit rating at Fitch Ratings, which highlighted concern about lack of growth and the buildup of debt in Europe’s second-largest economy.

France was cut by one step to AA+ from AAA, Fitch said today, joining Moody’s Investors Service and Standard & Poor’s in removing France from the shrinking club of top-rated governments. The outlook is stable.

Budget risks “lie mainly to the downside, owing to the uncertain growth outlook and the ongoing euro zone crisis, even assuming no wavering in commitment to fiscal consolidation,” Fitch said in a statement.

The downgrade is a reminder of the challenges President Francois Hollande faces in reviving an economy that has barely grown in more than two years and cutting the highest unemployment since 1999. The International Monetary Fund expects French gross domestic product to shrink 0.2 percent this year.

France was cut one level to AA+ from AAA in January 2012 by Standard & Poor’s. Moody’s followed in November, reducing France to Aa1 from Aaa. Investors have largely shrugged off those announcements, reflecting a shift from reliance on ratings agencies to a focus on in-house analysis.

Through July 12, French government bonds had gained 9.6 percent since the S&P decision and 0.3 percent since the statement by Moody’s, according to the Bank of America Merrill Lynch France Government Index.

Bond Yields

France’s 10-year government bond yield was at 2.193 percent today at the close, compared with 1.56 percent for Germany’s equivalent security. Its peak this year was 2.533 percent in June, up from a low of 1.659 percent in May.

Yields on sovereign securities last year moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg published in December.

Hollande nevertheless faces pressure from France’s international partners to revamp the economy following a decade in which the nation lost its share of world exports to countries ranging from Spain to China and Germany.

The European Commission told Hollande in May that he needs to press ahead with an overhaul of the pension system and labor market, while the IMF said the French government has no more room to raise taxes to plug its budget deficit.

Labor Contracts

Since winning office a year ago, Hollande pushed through measures making it easier for companies to sign labor contracts outside the framework of national union accords and offered a payroll tax credit to businesses. He plans changes to the pension system for later this year. More has to be done to create flexible contracts for low wage earners and to reduce legal uncertainty for companies in firing procedures, the IMF said.

“France has more than just cyclical problems, it has structural problems,” the IMF’s Edward Gardner told journalists in Paris last month. “But the number of reform that have been passed in the past six months shows that the government appreciates it has problems. But we see it as a first step in a long process.”

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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