S&P downgrades France credit rating to 'AA'

8th November 2013, Comments 0 comments

The Standard and Poor's agency on Friday downgraded France's credit rating by one notch to "AA," with outlook stable, dealing a further blow to President Francois Hollande's embattled Socialist government.

France's 10-year borrowing costs jumped after the announcement, with bond yields increasing to 2.389 percent from the 2.158 percent at the close of trading on Thursday.

S&P said it was cutting the rating from the previous "AA+" because government reforms would not raise medium term prospects and because lower economic growth was constraining the government's ability to consolidate public finances.

"We believe the French government's reforms to taxation, as well as to product, services and labour markets, will not substantially raise France's medium-term growth prospects and that ongoing high unemployment is weakening support for further significant fiscal and structural policy measures," the ratings agency said.

"Moreover, we see France's fiscal flexibility as constrained by successive governments' moves to increase already-high tax levels, and what we see as the government's inability to significantly reduce total government spending," it said.

French Finance Minister Pierre Moscovici in a statement deplored "the critical and inexact judgements" made by the agency.

And Prime Minister Jean-Marc Ayrault said that "France's ratings remains among the best in the world" and that the agency "does not take into account all the reforms" made by the government.

S&P said it expected net general government debt to peak at 86 percent of gross domestic product (GDP) in 2015 and unemployment to remain above 10 percent until 2016.

"Current unemployment levels are weakening support for further fiscal and microeconomic reforms, and are depressing longer term growth prospects," it said.

The stable outlook means there is a less than a one-in-three chance that the agency would change France's rating over the next two years.

France used to belong to the elite club of countries that enjoyed top AAA credit ratings, but has lost the top rating over the course of the past two years.

In July Fitch became the last of the world's top three ratings agencies to downgrade Paris, following similar moves in 2012 by S&P and Moody's.

Hollande, who was elected in May 2012 as France's first Socialist president in 17 years has seen his ratings plummet amid criticism over, among others, how his government has handled the economy.

An October poll found that fewer than one in four voters now back the beleaguered president.

His Socialist government has been criticised over its plans to reform France's debt-ridden pension system, with critics saying the plans do not go far enough.

Critics also say the government is not doing enough to reform the country's notoriously rigid labour market, as unemployment continues its upward march, hitting a new record high of 3.29 million in September.

Hollande has pledged to reverse the trend of rising unemployment in France by the end of the year, and while the government maintains this will still happen, critics are increasingly doubtful.

Hollande has also faced pressure from the European Union to meet the EU's ceiling of 3.0-percent-of-GDP, with forecasts predicting that the French government deficit will hit 4.1 percent this year, 3.8 percent next year and 3.7 percent in 2015.

© 2013 AFP

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