S&P hands France new downgrade
Rating agency cites slow reform pace
Nicholas vinocur
Paris: Standard & Poor’s yesterday cut France’s sovereign credit rating by one notch to AA from AA+, giving a thumbs-down to President Francois Hollande’s efforts to put the euro zone’s second-largest economy back on track.
All three major rating agencies had already stripped France of its top-grade AAA 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 reflects 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.
S&P also 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% of output in 2015.
Hollande’s government has enacted a modest reform 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 dose not change tack, it condemns itself to further long-term decline,” Holger Schmieding, an economist at Berenberg Bank, wrote in a research note.
While Hollande has relied on tax increases to pursue budget consolidation this year, he faces virulent resistance and has already backed down on applying a tax on trucking in the face of violent protests in western France.
A survey released yesterday showed Hollander’s popularity ratings were lower than any previous president’s in the 55-year-old Fifth Republic, highlighting his limited room for manoeuvre. The CSA poll showed Hollande’s approval rating at 25%, lower than a record of unpopularity held by former president Jacques Chirac
Philippe Waechter, head of economic research at Natixis Asset Management, said the downgrade reflected views that the French government was not implementing reforms needed to repair its economy and relying on hopes of cyclical upturn.
But, he said: “I don’t think there will be a dramatic impact on French debt in the short term, because S&P is not expressing alarm and the outlook is stable.
The downgrade applies to France’s Long-term foreign and local currency debt ratings.
Outspoken industry minister Arnaud Montebourg said credit rating agencies had “no credibility”.
“If we pushed this logic to its conclusion, I think states should start to grade the ratings agencies,” he told reporters. “there would be many dunce’s hats to distribute.” REUTERS