Moody’s downgraded France to AA1 from AAA and kept a negative outlook on the rating, citing deteriorating economy and an uncertain fiscal outlook. France’s growth faces persistent structural economic challenges, including its gradual but sustained loss of competitiveness and rigidities in labor and services markets, Moody’s said. France’s fiscal outlook is uncertain as a result of its deteriorating economic prospects, (46,21 USD, 2,69%) added.
Bottom line: France lost its top credit rating at Moody’s, but the fact that this follows a similar downgrade by Standard & Poor’s already in January, limits the negative market reaction. That said the move might concern some investors’ that France will follow peripheral countries into the debt crisis, if it gets caught in the spiral of higher costs of market financing. The Moody’s decision might also suggest that countries like Spain could be next for downgrade. Moreover, downgrade of France could have negative consequences for ratings of the eurozone bailout facilities, EFSF and ESM. These rely on the ratings strength of countries backing them to keep their costs of funding low. Moody’s put a negative outlook on its triple-A rating of the EFSF and said the facility's rating is sensitive to changes in the ratings of key contributors, including France.
• The Moody’s downgrade comes despite France’s recent announcements of structural reforms to boost competitiveness, suggesting those reforms are not enough to reassure the rating agency that the country is on the right track. This month President Hollande unveiled a EUR
20bn of tax breaks for companies over three years, funded by spending cuts and an increase in a form of sales tax. The government had also already announced EUR
30bn in budget savings next year in an effort to meet its deficit goal.
• Following the Moody’s announcement European stocks opened slightly weaker today (CAC: -0.4%, DAX
: -0.1% as of 9.30 a.m. CET). The euro
against the dollar was fairly flat compared to yesterday’s closing, at 1.2800 vs. 1.2810 on Monday's closing, after weakening somewhat, to 1.2770, shortly after the announcement.
• The downgrade had no impact on French government bond yields so far, still trading around record lows (10-year yield at 2.10% vs. 2.07% at yesterday’s closing).