France Credit Rating Cut to AA by S&P on Growth Outlook

France’s credit rating was cut by Standard & Poor’s, which said President Francois Hollande’s policies will fail to spur growth and fix public finances.

The nation’s long-term foreign- and local-currency grade was lowered one step to AA from AA+, S&P said in a statement today. France lost the top rating at S&P in January 2012. The outlook on the new grade, the third highest, is stable, according to the rating company.

“The French government’s current approach to budgetary and structural reforms to taxation, as well as to product, services, and labor markets, is unlikely to substantially raise France’s medium-term growth prospects,” S&P said.

Investors have largely shrugged off such downgrades, reflecting a shift from reliance on ratings companies to a focus on in-house analysis. Since S&P’s first downgrade of France on Jan. 13, 2012, French government bonds returned more than 10 percent, according to the Bloomberg France Sovereign Bond Index.

U.S. 10-year Treasury yields were 2.6 percent today, almost unchanged from the 2.56 percent they traded at on Aug. 5, 2011, the day S&P stripped the country of its AAA rating.

Today, French bonds fell, sending 10-year borrowing costs up two basis points to 2.39 percent, more than the 0.4 basis-point increase in comparable German costs and less than a gain of 5.1 basis points for Italy.

Credit-default swaps on France rose less than one basis point today to 53 basis points after dropping as low as 49 basis points yesterday, the lowest since April 2010. The contracts have fallen from 219 basis points on Jan. 13, 2012.

Hollande Defended

French Finance Minister Pierre Moscovici criticized the ratings cut and defended Hollande’s policies as a “massive” attempt to restore economic health. In the past year, the president has cut payroll taxes, loosened labor laws to make firings easier and lengthened working lives.

“France is and will remain a country whose credit is solid and that will continue to finance its debt at among the most attractive rates in the world,” the finance minister said on France Info radio.

France lost its AAA level at Fitch Ratings in July, after Moody’s Investors Service lowered the country to Aa1 from Aaa in November last year.

Hollande said today that France’s low borrowing costs demonstrate confidence in his policies. The government is “doing everything” to reduce the deficit, improve competitiveness and create jobs, he told a news conference in Paris.


The Socialist president, whose popularity is at a record low, has faced increasing resistance as he seeks to raise taxes to trim the budget deficit. He decided last week to suspend a truck levy in the face of protests, two days after backing down on a plan to increase taxation on savings programs.

French gross domestic product will expand 0.2 percent this year and 0.9 percent next year, before increasing 1.7 percent in 2015, the European Commission said earlier this week. That’s in line with the Hollande government’s own forecasts. As a percentage of GDP, public debt will climb to 96 percent in 2015 from 90.2 percent in 2012 when Hollande succeeded Nicolas Sarkozy, the commission predicted.

The yield on France's 1.75 percent securities due in May 2023 rose three basis points to 2.19 percent, 20 basis points less than the 2024 securities the nation sold for the first time yesterday.

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