Credit downgrade strikes blow to France
PARIS
A credit downgrade for France struck a new blow at the beleaguered French government on Friday and clouded the fragile eurozone recovery, but President Francois Hollande stood defiant.
The one-notch downgrade from “AA+” to “AA” by rating agency Standard and Poor’s is the latest sign of deep economic, political and institutional tensions in France, the second-biggest economy in the eurozone after Germany.
Analysts warn that France is now the weak link in the eurozone as it limps into recovery.
S&P chief economist Jean-Michel Six told AFP: “We do not see any overall plan to redefine public spending to release potential for growth” which would be “extremely weak growth.”
Standard and Poor’s said in strong terms akin to a wake-up call that high debt, taxes and unemployment were squeezing the government’s room for manoeuvre and that deeper structural reforms to cut spending and raise efficiency were urgently needed.
The French Socialist-Green government is already fighting to douse the fires of a tax revolt in western Brittany, backing away from a new truck tax and hoping the unrest will not spread.
The government has backed away from new taxes on savings and companies amid widespread objections to the rising cost of doing business, but also has its back against the wall on several other fronts.
On three key policy issues the government is on the back foot: on reducing the public deficit and unemployment and reversing weak competitiveness.
France earned a warning three days ago by the European Commission that it is set to breach its reform promises and job cuts and factory closures frequently fill the headlines.
And political alliances across the spectrum, including on the left, are in turmoil while the latest poll shows that 77 percent of electors disapprove of the president’s policies.
Unrest could trigger market shift against France
Hollande reacted indirectly but defiantly to the downgrade, telling a meeting with global financial institutions on Friday that he would stick to his strategy and hold his course on economic reforms.
This policy “which is being pursued, is the only one which can ensure credibility” for France, and was reflected in low borrowing costs on the bond market he said.
But the downgrade pushed up France’s 10-year borrowing rate sharply to 2.391 per cent from 2.158 per cent and depressed French shares.
The yield on 10-year French bonds rate fell back to 2.18 per cent in afternoon trading, however.
Economist Amit Kara at UBS noted that reaction on the bonds markets has historically been muted, but that “sentiment could turn from one day to another”.
He said that “the trigger point could be the social unrest if it gets worse.”
Whatever happens, “bond yields are the only language politicians understand,” he said.
A European Commission spokesman said he “has confidence in France implementing its reforms because they are necessary.”
But analysts broadly agreed with the analysis by S&P which said “the French government’s current approach to budgetary and structural reforms … is unlikely to substantially raise France’s medium-term growth prospects.”
Space for manoeuvre was compressed by high taxes and “the government’s inability to significantly reduce total government spending,” it said warning that tax rises had reached the limit
Finance Minister Pierre Moscovici attacked S&P for making “critical and inexact judgements”, and Prime Minister Jean-Marc Ayrault said the decision ignored recent reforms.
“Investors can and will continue to have confidence in France,” said Moscovici.
But the sovereign debt downgrade casts a shadow over the unsteady eurozone recovery from recession, which was given a boost on Thursday when the European Central Bank cut its key rate by a quarter point to 0.25 per cent.
S&P put a stable outlook on the French rating, meaning a less than a one-in-three chance for another grade change, but warned the outlook for progress on reforms was not good.
S&P estimated that government debt relative to output would peak at 86 per cent in 2015, the unemployment rate would be above 10 per cent up to 2016, that the economy would show close to zero growth this year and slightly more than one per cent in 2014-2015.
The public deficit would be four per cent of output this year, as forecast by the government, but up from the agency’s estimate of 3.5 per cent when it held the French rating steady in November 2012.
Taxes and levies would amount to 53.0 percent of GDP up to 2015, the “highest in the eurozone”.
Market analyst at Credit Agricole CIB in Paris, Herve Goulletquer, said France “is looking rather like the weak point in the European panorama.”
At Berenberg Bank in London, economist Holger Schmieding said that rescued eurozone countries were making progress but France had done little to reform and was now “Europe’s real problem.”
At the Bank of Tokyo-Mitsubishi UFJ in London, senior analyst Derek Halpenny said: “This is another damaging blow to the credibility of President Hollande.”
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