France’s Rating Affirmed by Moody’s; Retains Negative Outlook

France’s Aa1 credit rating was affirmed by Moody’s Investors Service, which maintained a negative outlook based on the continued reduction in the competitiveness of the nation’s economy.

That trend risks triggering a further deterioration in the government’s financial strength and the nation’s long-term growth prospects, Moody’s said in a statement last night. The debt-to-GDP ratio has risen to 93.6 percent in 2013 from 90.2 percent in 2012, and Moody’s expects a further increase to above 95 percent by the end of 2014.

Investors have largely shrugged off credit rating changes, reflecting a shift to a focus on in-house analysis from reliance on ratings companies. Since France first lost its AAA rating with Standard & Poor’s on Jan. 13, 2012, the yield on France’s benchmark 10-year government bond has dropped to about 2.38 percent from 3.04 percent.

“The government has introduced a number of measures here, but we see these policy initiatives as being complicated by persisting, long-standing rigidities in the labor, goods and services markets,” Dietmar Hornung, associate managing director at Moody’s in Frankfurt, said in a phone interview.

France is committed to pursuing the recovery of its growth and competitiveness, French Finance Minister Pierre Moscovici said in an e-mailed statement after the announcement.

New Policies

President Francois Hollande is struggling to revive an economy that has barely grown in the past two years, pushing jobless claims to a record high of more than 3 million. Having failed to stem a rise in unemployment last year, Hollande is pledging more cuts in public spending and a reduction in payroll taxes to bolster business confidence and hiring.

“The time has come to resolve the main problem of France: its production,” Hollande said Jan. 14. “We must produce more and better. It’s on the supply side we must act. Supply itself creates demand. We must continue to reduce the cost of labor.”

Business leaders have welcomed the Socialist president’s shift in rhetoric while calling for the government to transform what Hollande is calling a “responsibility pact” into action.

This is “a step in the right direction,” Jean-Pierre Clamadieu, chief executive of chemical maker Solvay, said. “Yet for now these are just words. We need some substance.”

France’s 10-year note yield fell 5 basis points yesterday to 2.38 percent. The yield difference between French 10-year bonds and benchmark German bunds was little changed at 72 basis points after widening to 75 basis points, the most since April 2. The French security is due in May 2024 and the German in August 2023.

French gross domestic product probably grew 0.2 percent in 2013 and will expand 0.9 percent this year, before increasing 1.7 percent in 2015, the European Commission 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, according the commission.

France has the second-highest grade in the Moody’s rating scale and at Fitch Ratings, while it has the third-highest score at S&P.