Moody’s Slashes France’s Prized “AAA” Credit Rating

on Nov 20, 2012

On Monday 19 November Moody’s, one of the big three international credit rating agencies, downgraded France’s government bond rating by one notch.

**From triple-A to AA1**
Moody’s slashed France’s rating from AAA to AA1 and kept its negative outlook set on 13 February this year. The rating agency explained the downgrade comes as a result of weak prospects for long-term economic growth, which is negatively affected by structural challenges, including loss of competitiveness, and the long standing shortcomings in the goods, service and labour markets.

The country’s fiscal health is also ailing both in the short term due to “subdued domestic and external demand” and long term due to the structural weaknesses outlined. France’s soaring public debt, already above 90 percent of gross domestic product, threatens to create yet another victim of the Eurozone debt crisis. Its exposure to peripheral countries from the Eurozone through trade linkage and the banking system is “disproportionally large”.

Moody’s decision follows Standard & Poor’s downgrade of France’s rating a notch in January. Despite the S&P’s reduction, much feared by the previous centre-right government, the country enjoyed record low borrowing costs so far in 2012. As reported by the Financial Times, in July the debt office in Paris issued €7.7 billion (£6.19 billion) of six-month treasury bills with a weighted average yield of negative 0.006 percent.

Finance Minister Pierre Moscovici commented that Moody’s downgrade was a “sanction for past management” of the country, referring to the government of Nicholas Sarcozy. He also reiterated the importance of reducing the government’s budget deficit to 3 percent of GDP by next year and improving France’s competitiveness. According to The Guardian, the Socialist government hopes to achieve its deficit target on the back of estimations that growth will climb to 0.8 percent and unemployment will fall from its current 13-year high.

**French Politicians Indignant At Economist Article**
!m[The Country Sees Its Reputation Falter Following Last Week’s Publication by The Economist](/uploads/story/851/thumbs/pic1_inline.png)Last week The Economist ran an article titled “France and The Euro: The time-bomb at the heart of Europe” placing it on its front cover with a picture of seven baguettes wrapped in the red, white and blue ribbon of the French Republic with a lit fuse protruding from the centre. The article argued that President Francois Hollande is not decisive enough in implementing economic reforms, which could jeopardise the future of the Eurozone.
“Unless Mr Hollande shows that he is genuinely committed to changing the path his country has been on for the past 30 years, France will lose the faith of investors—and of Germany.” The Economist wrote. “The crisis could hit as early as next year. Previous European currency upheavals have often started elsewhere only to finish by engulfing France—and this time, too, France rather than Italy or Spain could be where the euro’s fate is decided. Mr Hollande does not have long to defuse the time-bomb at the heart of Europe.”
France’s Prime Minister Jean-Marc Ayrault immediately reacted to the article. ‘You are talking about a publication which is resorting to excess to sell copies. I can tell you that France is not at all impressed.’ he told a French station. Other politicians such as Industry Minister Arnaud Montebourg also expressed their disagreement with what The Economist decided is appropriate to publish. Head of France’s MEDEF employers’ association Laurence Parisot said the article got only one thing right –France is truly “at the heart of Europe”.
John Peet, The Economist’s Europe editor, defended the publication last week, saying it is designed to shock but also spur action so that the government finally goes through with the much needed economic reforms.


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