France’s credit outlook cut to ‘negative’ by Standard and Poor’s

Citing concerns about its struggling economic recovery, France’s credit outlook has been downgraded to ‘negative’ by credit rating agency Standard and Poor’s. It reaffirmed France’s ‘AA/A-1+’ long- and short-term sovereign credit ratings.

Standard and Poor’s (S&P) believes the French government’s budgetary position is deteriorating because its nominal and real economic growth prospects have worsened.

S&P wrote in a statement:

“We believe that, due to policy implementation risk related to the budgetary consolidation and structural reforms, a recovery of the French economy could prove elusive and that France’s public finances might deteriorate beyond 2014, although this is not our base-case scenario.”

S&P forecasts an average government deficit for France of 4.1% of GDP for the 2014-2017 period, against 3.2% as of April 2014. It has reduced its prediction of GDP growth to 1.2% annually from 2014 to 2017, from its previous forecast of 1.3%.

France to pursue needed reforms

Michel Sapin says his country will implement and stick to reforms. (Photo: French Government)

Michel Sapin, France’s Minister of Finance and Public Accounts, took note of S&P’s latest rating update and said that despite his country’s economic situation which weighs on its fiscal balance, his government is committed to implementing announced policies.

Mr. Sapin said:

“We are implementing the expenditure savings we announced as well as the Responsibility and Solidarity Pact, so as to gain in competitiveness. We will pursue the needed reforms, to boost our medium term growth prospects.”

“Against the background of a weak recovery and an abnormally low inflation in the euro area, each member country has to be up to its responsibilities and a coordinated economic policy has to be set up at the European level in order to boost growth.”

Mr. Sapin reminded investors that his country’s debts are among the safest and most liquid in the world, “with a very contained debt service.”

According to official figures from the Bank of France, French GDP flatlined in the second quarter, while forecasts for Q3 2014 stand at just 0.2% (annualized) growth.

The French government says it will take two years longer to bring its budget deficit in line with the EU’s threshold of 3% of GDP. The estimated date for reaching that target is now 2017.

S&P justified France’s holding onto its ‘AA/A-1+’ rating because of its high income per capita and productivity, improving competitiveness and profitability among French businesses, as well as its stable financial sector.