S&P lowers France credit rating, cites slow reform pace
paris — Standard & Poor’s cut France’s sovereign credit rating on Friday by one notch to AA from AA+, giving a thumbs-down to President Francois Hollande’s efforts to put the eurozone’s second largest economy back on track.
All three major rating agencies had already stripped France of its top-grade triple-A status. But S&P was the first to downgrade it for a second time, warning that the economic reforms of the past year were not sufficient to lift growth.
The downgrade reflected fears that the government may struggle to push through further unpopular changes due to violent protests against its budget policy and record low opinion poll ratings for Hollande.
Hollande noted that market interest rates on French government debt, which are slightly less than half a per centage point higher than Germany’s on the benchmark bond, remained low. His Socialist-led government was committed to making all possible budget savings measures but not at the price of sacrificing France’s welfare model, he added.
“This policy... is the only one that can guarantee our credibility and we can judge that from the low interest rates on the markets,” he said at a World Bank conference in Paris. Data released on Friday showed a surprise drop in industrial production in September and a wider trade deficit, underscoring weakness in an economy where unemployment is stuck at around 11 per cent.
S&P adjusted its outlook for French debt to stable from negative, citing Hollande’s commitment to containing net debt, which it expects to peak at 86 per cent of output in 2015.
Market reaction was muted with yields on France’s 10-year bond rising slightly. The gap in yields between French and German debt — which is the eurozone benchmark — widened by three basis points to 48.5 bps from 45.2.
Shares in French banks fell at the market opening.
Hollande’s government has enacted a modest reform of the rigid labour market and a review of its generous pension system aimed at narrowing funding shortfalls.
But the latter in particular was less than expected by the European Commission, which urged Paris this year to make structural reforms in return for giving it an extra two years to bring its public deficit within EU targets.
“If France does not change tack, it condemns itself to further long-term decline,” Holger Schmieding, an economist at Berenberg Bank, wrote in a research note.