S&P cuts France debt rating to AA on weak growth outlook

Staff Writer
Columbus CEO

(c) 2013, Bloomberg News.

PARIS — France's credit rating was cut by Standard & Poor's, which said President Francois Hollande's policies will fail to spur growth and fix the public finances.

The nation's long-term foreign- and local-currency grade was lowered one step to AA from AA+, S&P said in a statement Friday. France lost the top rating at S&P in January 2012. The outlook on the new grade, the third highest, is stable, according to the rating company.

French bonds fell, sending the 10-year yield up 2 basis points to 2.39 percent, more than the 0.4 basis-point increase in the comparable German security and less than the a gain of 5.1 points for Italy. France's 10-year yield was at 3.04 percent on Jan. 13, 2012, the day of its first downgrade. U.S. 10-year Treasury yields were 2.6 percent Friday, almost unchanged from the 2.56 percent they traded at on Aug. 5, 2011, the day S&P stripped the country of its AAA rating.

"The downgrade reflects our view that the French government's current approach to budgetary and structural reforms to taxation, as well as to product, services, and labor markets, is unlikely to substantially raise France's medium-term growth prospects," S&P said. "Moreover, we see France's fiscal flexibility constrained by successive governments' moves to increase already high tax levels and what we see as the government's inability to significantly reduce total government spending."

French Finance Minister Pierre Moscovici criticized the ratings cut and defended Hollande's policies as a "massive" attempt to restore economic health. In the past year, the president has cut payroll taxes, loosened labor laws to make firings easier and lengthened working lives.

"France is and will remain a country whose credit is solid and that will continue to finance its debt at among the most attractive rates in the world," the finance minister said on France Info radio. "For us what counts is the structural reform of the French economy" and the S&P analysis "underestimates the capacity of France to reform and recover."

Hollande said that France's low borrowing costs demonstrate confidence in his policies. The government is "doing everything" to reduce the deficit, improve competitiveness and create jobs, he told a news conference here Friday.

The Socialist president, whose popularity is at a record low, has faced increasing resistance as he seeks to raise taxes to trim the budget deficit. He decided last week to suspend a truck levy in the face of protests, two days after backing down on a plan to increase taxation on savings programs.

France dropped from the AAA level at Fitch Ratings in July, after Moody's Investors Service lowered the country to Aa1 from Aaa in November last year. Investors have largely shrugged off those announcements, reflecting a shift from reliance on ratings companies to a focus on in-house analysis.

Since S&P's first downgrade on Jan. 13, 2012, French government bonds returned more than 10 percent, according to the Bloomberg France Sovereign Bond Index.

Credit-default swaps on France rose less than one basis point Friday to 53 basis points after dropping as low as 49 basis points Thursday, the lowest since April 2010. The contracts have fallen from 219 basis points on Jan. 13, 2012.

French gross domestic product will expand 0.2 percent this year and 0.9 percent next year, before increasing 1.7 percent in 2015, the European Commission said earlier this week. That's in line with the Hollande government's own forecasts. As a percentage of GDP, public debt will climb to 96 percent in 2015 from 90.2 percent in 2012 when Hollande succeeded Nicolas Sarkozy, the commission predicted.

_ With assistance from Tom Kohn in Frankfurt, Colin Keatinge in Singapore and Paul Dobson and Abigail Moses in London.

bc-france