Moody’s strips France of AAA-rating

Moody’s has cut the sovereign credit rating on Europe’s second biggest economy by one notch to Aa1 from Aaa, citing an uncertain fiscal outlook and deteriorating economy.

The downgrade, which follows a cut by Standard & Poor’s in January, was widely expected but is still a blow to Socialist President Francois Hollande as he strives to convince the world he can fix France’s public finances and stalled economy.

Moody’s said it was keeping a negative outlook on France due to structural challenges and a “sustained loss of competitiveness” in the country, where business leaders blame high labour charges for flagging exports.

“The first driver underlying Moody’s one-notch downgrade of France’s sovereign rating is the risk to economic growth, and therefore to the government’s finances, posed by the country’s persistent structural economic challenges,” Moody’s said.

“These include the rigidities in labour and services markets, and low levels of innovation, which continue to drive France’s gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base.”

Finance Minister Pierre Moscovici said the downgrade was a motivation for the six-month-old Socialist government to pursue reforms, but he noted that even after the S&P downgrade French debt has enjoyed record low yields.

He also said the government was committed to meeting its target of cutting the public debt to three per cent of economic output next year from an estimated 4.5 per cent this year.

The euro slid against the US dollar after the downgrade, by 0.30 per cent from nearly a 2-week high to $1.2770, even though analysts said the downgrade was largely factored into bond markets.

The S&P downgrade had little impact on French yields, which have been trading at record lows of just over 2 per cent in recent weeks despite the concern about France’s sickly economy.

“There is probably more downside until the knee jerk reaction is out of the way. But on the whole it seems likely that this more reflects an existing reality than new information for the market,” said Steven Englander, global head of G10 FX strategy at Citi.