French credit rating slips to AA

French credit rating according to S&P (Standard and Poor’s), which nearly two years ago stood at AAA, first dropped to AA+, and has now fallen further to AA.

Standard & Poor’s said that the French governments taxation reforms, as well as reforms to its labor markets, services and products will not significantly raise the country’s medium-term growth prospects.

S&P added that “(France’s) ongoing high unemployment is weakening support for further significant fiscal and structural policy measures.”

Weaker economic growth is undermining the French government’s ability to strengthen public finances, the credit rating agency believes.

French credit rating unlikely to change for two years

S&P believes it is unlikely (less than a 1 in 3 chance) that over the next two years it will alter France’s credit rating. Some may see this as a blessing – at least over the next 24 months the country is unlikely to slip further.

S&P economists think that France is committed to containing the net general government debt, which they forecast will peak in 2015 at 86% of GDP.

In a communiqué, S&P wrote:

”In our opinion, the economic policies the government has implemented since we affirmed the ratings on France on Nov. 23, 2012 have not significantly reduced the risk that unemployment will remain above 10% until 2016, compared with an average of 8%-9% prior to 2012. In our view, the current unemployment levels are weakening support for further fiscal and microeconomic reforms, and are depressing longer term growth prospects.”

It took until 2013 for France’s GDP to reach its fourth quarter 2007 level. S&P analysts expect near-zero GDP growth for 2013 and slightly more than 1% in 2014.

S&P says France not doing enough

France is praised for introducing corporate tax credits on companies’ payrolls as well as reaching agreement on labor market and microeconomic reforms. However, S&P believes they are not enough to make much of a difference regarding the country’s economic growth potential.

S&P added “In particular, we think private-sector growth is unlikely to improve substantially without further structural reforms. While the government has taken steps toward microeconomic reforms, the overall effect appears to us to leave France with less economic flexibility than other highly-rated eurozone members.”

French exporters continue to lose market share to other European nations which have taken steps to make their economies less rigid.

Pierre Moscovici, France’s Finance Minister, accused S&P of making critical and inexact judgments. He said “During the last 18 months the government has implemented major reforms aimed at improving the French economic situation, restoring its public finances, and its competitiveness.”

French President, François Hollande, said he plans to carry on taking measures to make his country’s economy more competitive and reduce unemployment. At an event at the World Bank in Paris Hollande said “This policy is the only one that will ensure our credibility.”

High taxes not bringing budget deficit down

Hollande’s policy of high taxes aimed at getting the budget deficit below 3% of GDP in 2013 has failed so far. The French government has pushed that aim forward to next year. The European Commission warned that France is heading for a 3.7% deficit in 2015.

According to Groupe CSA, a polling company, only 25% of respondents in a November survey said they had faith in Hollande’s ability to deal effectively with the major problems facing the country (affronter efficacement les principaux problèmes qui se posent au pays), 5% percentage points less than in October.

Today only 10 countries have a perfect AAA/Aaa (S&P/Moody’s) rating: Switzerland, Sweden, Singapore, Norway, The Netherlands, Luxembourg, Germany, Finland, Denmark, Canada and Australia.