SALON

Tuesday, Nov 20, 2012 3:51 PM UTC

Moody’s strips France of AAA credit rating

French government says it is just a matter of time before economic reforms bear fruit VIDEO

By

Topics: aol_on, Moody's, Francois Hollande, S&P, Video, France, Economics, Credit rating, ,

Moody's strips France of AAA credit ratingFrench President Francois Hollande (AP Photo/Bilal Hussein) (Credit: AP)

PARIS (AP) — France’s government has shrugged off the latest downgrade of its credit rating, saying Tuesday that it just needs time for reforms to the sluggish economy to take root.

In a setback for President Francois Hollande’s Socialist administration, Moody’s Investors Service stripped Europe’s No. 2 economy of it of its prized AAA credit rating late Monday on concerns that its rigid labor market and exposure to Europe’s financial crisis were threatening its prospects for economic growth.

This is the second ratings downgrade to have hit France this year: Standard & Poor’s agency lowered its score in January. The third leading agency, Fitch, still ranks France at AAA-rating but warned it could still be downgraded.

Finance Minister Pierre Moscovici insisted that France’s credibility remains strong and that the government’s plan to reduce unemployment and restore growth would bear fruit.

France has come under scrutiny as its €2 trillion ($2.5 trillion) economy has stagnated, with many leading French companies laying off workers. Meanwhile, Hollande has struggled to reassure economists that his attempts to revive the French economy will be successful.

Hollande’s administration has laid out a series of deficit-reduction targets, vowing to bring it in line with European rules next year. It has also unveiled a plan to improve the competitiveness of its economy, by giving companies €20 billion ($25 billion) in tax rebates, reducing red tape for businesses, and providing small companies with extra support to compete abroad.

However, many economists say that the greatest threat to France’s economy is its stringent labor rules, which make firing difficult and expensive and thus deter hiring. The country has been losing global business for years to more dynamic economies like China’s, while fighting unemployment of 10.8 percent and concerns about the future of the eurozone.

The French government is currently leading negotiations between businesses and unions in the hopes of reforming labor rules by the end of the year.

Moscovici pleaded for time Tuesday, arguing that the government had inherited a difficult economic and budgetary situation from former President Nicolas Sarkozy. He said the government is convinced it is now on the right path but that its reforms just need to take effect.

“It takes time to reverse the flow of things. It takes courageous decisions, and that’s what we’re promising to do,” he told reporters.

To the ratings agencies, critics and investors, he said: “Judge us on our results.”

Trouble for France would mean wider trouble for Europe. France and Germany, which underpin the group of 17 European Union countries that use the euro, have taken the lead in finding solutions to the continent’s debt crisis. Any slip in France’s clout could endanger its ability to lead negotiations.

In an early sign of how the rating could affect the eurozone ability to solve its financial crisis, its bailout fund was forced to cancel a bond auction Tuesday. Officials with the European Financial Stability Facility said the downgrade caused a technical problem since the EFSF’s rating is now higher than that of France, which is a major backer of the fund.

EFSF CFO Christophe Frankel did not say how the glitch would be resolved but said he thought it could be. The EFSF has been replaced by the European Stability Mechanism, but is still handling the bailouts of Greece, Ireland and Portugal.

Moscovici also insisted that relations with Germany remained strong. There have been reports recently that Germany is concerned about the health of the French economy.

But German Finance Minister Wolfgang Schaeuble seemed unconcerned about the downgrade.

“We have received the news that, overnight, our most important partner got a little admonition from a rating agency,” Schaeuble said in the German Parliament. “The rating for France is still very stable, so that we avoid any dramatization.”

Moody’s itself said that the rating remains so high — now Aa1, just a notch below triple-A —because of the size of the French economy and the government’s commitment to make structural reforms. It kept the rating’s outlook at negative, meaning it could face future downgrades.

The downgrade, like S&P’s before it, appeared to be having a limited effect on France’s borrowing costs. The yield, or interest rate, on the benchmark 10-year bond was up 0.05 percentage points to 2.01 percent on Tuesday afternoon. Germany’s was up the same rate to 1.39 percent.

Moscovici said he expected the country to continue to be able to borrow at those historically low rates because of the seriousness of its reform package.

Analysts warned, however, that French banks could next face downgrades, since they are significant holders of French government debt and ultimately backed by the government.

 

More Associated Press.

Next Article

Related Stories

More Related Stories

Featured Slide Shows

The week in 10 pics

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11
  • Lisa Montgomery embraces her nephew Thursday after a tornado tore apart her home in Cleburne, Texas. The twister killed six people and destroyed entire swaths of the North Texas town.
    Credit: AP/LM Otero

  • Jack McMahon, the defense attorney for abortion doctor Kermit Gosnell, speaks outside the Criminal Justice Center in Philadelphia Tuesday. His client was convicted of killing three babies in his clinic, and will serve multiple life sentences.
    Credit: AP/Matt Rourke

  • A photo taken Monday captures Vice President Joe Biden's response to a Milwaukee second-grader's innovative proposal to end America's epidemic of gun violence. This guy!
    Credit: AP/Jenny Aicher

  • Sen. Rand Paul, R-Ky., flanked by a grouper-eyed Michele Bachmann, addresses the IRS' admission that it targeted Tea Party groups in advance of the 2012 election. In an op-ed for CNN Thursday, the Kentucky senator slammed the president for his faux outrage.
    Credit: AP/Molly Riley

  • Ousted IRS chief Steven Miller is sworn in on Capitol Hill Friday. Miller testified before the House Ways and Means Committee on the extra scrutiny the agency gave conservative groups applying for tax-exempt status.
    Credit: AP/J. Scott Applewhite

  • Attorney General Eric Holder pauses as he testifies on Capitol Hill before the House Judiciary Committee Wednesday. Holder is under fire, among other things, for the Justice Department's gathering of phone records at the Associated Press.
    Credit: AP/Carolyn Kaster

  • O.J. Simpson sits during an evidentiary hearing at Clark County District Court in Las Vegas, Nev., Thursday. Simpson, who is currently serving a nine-to-33-year sentence in state prison for armed robbery and kidnapping, is using a writ of habeas corpus to seek a new trial.
    Credit: AP/Las Vegas Review-Journal/Jeff Scheid

  • Major Tom to ground control: On Sunday astronaut Chris Hadfield recorded the first music video from space, a cover of David Bowie's "Space Oddity."
    Credit: AP/NASA/Chris Hadfield

  • When it rains it pours. President Barack Obama speaks during a news conference Thursday with Turkish Prime Minister Recep Tayyip Erdogan, inexplicably inspiring an #umbrellagate Twitter meme.
    Credit: AP/Jacquelyn Martin

  • A smoke plume rises high above a road block at the intersection of County A and Ross Road east of Solon Springs, Wis., Tuesday. No injuries were reported, but the the wildfire caused evacuations across northwestern Wisconsin.
    Credit: AP/The Duluth News-Tribune/Clint Austin

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11

Related Videos

Comments

 6 Comments

Comment Preview

Your name will appear as username

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>

follow salon

Most Read

Popular on Reddit

links from salon.com

From Around the Web

Presented by Scribol
listener_new_rect The Listener: So long, Sookie Stackhouse

Recommendations