France to answer ratings downgrade with reforms
By Leigh Thomas and Daniel Flynn | November 20, 2012 11:00 PM EST
France said it would respond to Moody's credit downgrade by pushing ahead with economic reforms but complained the ratings agency had overlooked efforts already taken to revamp the euro zone's second largest economy.
France lost its prized triple-A badge from the Standard & Poor's in January and so Monday's move by Moody's was not surprising but it underlined doubts about Socialist President Francois Hollande's ability to fix France's public finances.
The downgrade also highlighted the divergence with the top-rated regional powerhouse Germany whose finance minister called it a "small warning" to its most important euro zone partner.
However, Moody's cut to Aa1 with a negative outlook did not affect the status of French bonds which along with German debt are seen as a safe haven from the crisis in southern Europe.
"Moody's raised concerns about France's capacity to reform and so it is up to us to show that this time we are going to carry out reforms," Finance Minister Pierre Moscovici, leading a government offensive to play down the move, told journalists.
"The rating change does not call into question either the economic fundamentals of our country, the efforts undertaken by the government or our creditworthiness."
The government is planning the toughest belt-tightening effort in 30 years in 2013 but must also try and halt a growth slow-down that has seen unemployment surge to 13-year highs.
Moody's said it kept 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. It also cited "sizable exposures" of its banks to weak, southern euro zone countries.
"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.
The downgrade sent the euro 0.30 percent lower to 1.2770 against the dollar late on Monday but the currency recovered some ground to trade at 1.2800 at 1030 GMT Tuesday.
The benchmark French 10-year government bond yield - which has been trading at historic lows and offering Hollande crucial access to cheap borrowing - was barely changed at 2.10 percent versus 2.08 percent before the downgrade.
Moody's said France could downgrade again if efforts to free up the rigid labour market and overhaul an economy where public spending accounts for 57 percent of output ran into trouble.
"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," Moody's lead France analyst Dietmar Hornung told Reuters.
"If there are substantial economic and financial shocks from the euro area debt crisis, that would also exert downward pressure on France's rating."
The downgrade follows concerns raised by the International Monetary Fund that France could be left behind as Italy and Spain reform at a faster pace. But analysts said they expected French bonds to remain resilient for now.
"The French debt market is highly liquid and remains a favoured venue for international investors, particularly in a world where 'double-A' is becoming the norm among Western states," Barclays France director Franklin Pichard said of a string of sovereign debt downgrades over the past four years.
Yet with Germany one of the few major economies to retain a triple-A rating, the move is likely to reinforce Berlin's role as the capital calling the shots in the 17-country euro zone.
"This is an additional impulse for the reforms that the French president has already announced," Michael Grosse-Broemer, parliamentary whip of German Chancellor Angela Merkel's ruling CDU party, told Reuters.
Finance Minister Wolfgang Schaeuble said the downgrade should not be overdramatised but said it was a warning for everyone in Europe to live up their responsibilities.
With France's 2-trillion-euro economy teetering on the brink of recession, Hollande surprised many this month by unveiling measures to spur industrial competitiveness, chief among them the granting of 20 billion euros in annual tax relief to companies, equivalent to a 6 percent cut in labour costs.
The government had already announced 30 billion euros in budget savings next year in an effort to meet its deficit goal and is working on reforms to labour laws to enable companies to hire and fire more easily with economic swings.
"Certain criticisms are too strong or are too late. I would have preferred that the bold and unprecedented decisions on the crisis were better received," Moscovici said of Moody's.
He said it was unfair to flag concerns over French banks as they have already reduced exposure to troubled southern European countries such as Greece.
"I don't expect it (the downgrade) to have an immediate knock-on impact today on access to and cost of funding," said Espirito Santo analyst Andrew Lim of the possible impact on the banking sector.
"But it's symptomatic of the wider concerns of a plain-vanilla negative impact on the economy being suffered in the next few months and quarters. Spain, Italy and peripheral Europe are weakening and France's exposure to them is something to be aware of."
(Additional reporting by Blaise Robinson and Alexandre Boksenbaum-Granier; Blaise Robinson; Andreas Rinke in Berlin; Writing by Mark John; editing by Anna Willard)
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