Moody’s warns of further cut to France’s debt rating

Dietmar Hornung, Moody’s lead analyst for France’s sovereign rating, said a sustained loss of competitiveness and a failure to tackle structural problems prompted the decision to cut France’s rating, by one notch to Aa1, with a negative outlook.

France has one of the world’s highest levels of public spending at 56 per cent of gross domestic product (GDP). Moody’s said it was worried about the country’s fiscal situation and its exposure to the euro crisis.

“We would downgrade the rating further in the event of an additional material deterioration in France’s economic prospects or in a scenario in which there were difficulties in implementing the announced reforms,” Mr Hornung said.

He cited a plan to enable companies to hire and fire more easily – which is bogged down in talks between unions and employers – as a key test for France’s creditworthiness.

French debt markets yesterday shrugged off the widely-expected downgrade. Standard & Poor’s removed France’s AAA rating in January. Some investors require their best assets to have top ratings from two of the three major rating agencies.

The yield on French bonds crept up slightly to 2.1 per cent, from around 2.08 per cent on Monday.

Mr Hornung said France remained vulnerable to shocks from the eurozone crisis, particularly given its disproportionately large exposure to some of the eurozone’s most troubled debtors via trade and its banks.

“If there are substantial economic and financial shocks from the euro area debt crisis, that would also exert downward pressure on France’s rating,” he said.

Mr Hornung welcomed France’s 2013 budget, which included 30 billion euros in deficit-cutting measures, and a competitiveness pact unveiled this month aimed at reducing companies’ labour costs as “significant steps”.

“These announcements are credit supportive and led to our decision to limit the downgrade to one notch,” he said.

“But we still think the 2013 budget and the medium-term budget plan is based on too optimistic growth assumptions.”