By Richard Johnstone | 8 November 2013
France has had its credit rating cut for the second time in less than two years after Standard and Poor’s downgraded the country from AA+ to AA yesterday.
The ratings firm said the downgrade was due to low economic growth in the country constraining the government's ability to reduce public spending.
In addition, the firm concluded that taxation and labour market reforms introduced since the election of President Francois Hollande in April 2012 would not substantially raise the country’s medium-term growth prospects. France was first downgraded by S&P in January 2012, from the top triple-A grade to the second notch AA+. Other major agencies – Fitch and Moody’s – both following suit and moved France’s sovereign debt down one level.
S&P is now the first of the major firms to downgrade France a second time.
Its Rating action report stated the country’s fiscal flexibility was constrained by moves from successive governments to increase tax levels, while the government had demonstrated an inability to improve the public finances.
As unemployment is expected to remain above 10% until 2016, compared with an average of 8%-9% prior to 2012, the country is likely to struggle to cut spending in the short term, S&P said.
The number of people out of work is also depressing longer-term growth prospects. Steps taken by Hollande’s government to boost employment, including reaching agreement on labour market reforms in specific sectors were ‘probably insufficient to significantly unlock France's economic growth potential’, S&P stated.
Ongoing high levels of unemployment mean support for further significant fiscal and structural policy measures was weakening.
Responding to the announcement, Pierre Moscovici, France’s economy and finance minister, said the decision was regrettable.
He said that a number of ‘inaccurate criticisms’ had been made by S&P, and no French government has ever implemented as many economic reforms in as short a time period as the current administration.
The government’s determination to cut borrowing, restore competitiveness and support growth and employment was ‘unaltered’, he said.
‘The French debt is and remains among the safest and most liquid ones within the eurozone, benefiting from historically low rates, sign of investors’ reaffirmed confidence.
‘This confidence strengthens the government’s conviction that its strategy is the right one.’
