Credit rating heavyweight Moody's Investors Service has stripped France of its top AAA rating to Aa1 with a negative outlook, sending a warning to President Hollande’s endeavours to rebuild French economic growth and credibility.
Moody’s said its decision to downgrade Europe’s second largest economy reflects France’s deteriorating economic outlook, the recession in the wider Eurozone and "substantial" challenges to the government's reform plans.
"The first driver underlying Moody's one-notch downgrade of France's sovereign rating is the risk to economic growth, and therefore to the government's finances, posed by the country's persistent structural economic challenges," Moody's announced in a press release.
Moody’s negative assessment follows Standard & Poor’s decision in January to cut the country’s credit rating thus intensifying pressure on Hollande to find ways to increase growth in the country.
"The track record of successive French governments in effecting such measures over the past two decades has been poor," Moody's said about the French reform plans.
Analysts believe, given the EU’s economic trajectory since the start of the crisis, there isn’t much any of the euro countries including France can do to reverse the situation.
“I do not think there’s much of a chance for France and Germany and some of the other countries to really prevent this. There has to be a major structural change both within these countries and economies individually and within the European Union broadly” Margaret Bogengrief from ACM crisis management told RT.
The rating agency also cautioned Paris against becoming victim of the bail-outs for eurozone partners via the European Stability Mechanism (ESM) saying: “France is disproportionately exposed to peripheral European countries such as Italy through its trade linkages and its banking system.”
With Paris serving as one of the guarantors of the ESM, there’re some voices calling for a restructuring of the EU.
“The European Union economically as it stands is an unsustainable organization. It is an unsustainable financial and economic Oedipus. With this downgrade, it pushes France and Germany and some of the biggest countries to recreate the European Union. I mean, stop supporting some of the other economies, such as Greece, Portugal, Spain, Italy and regroup and recreate the European Union,” Bogengrief says.
Bailout facilities, such as the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism, rely on heavyweight countries backing them to keep their costs down. In July, Moody’s signalled a negative outlook on its AAA rating of the EFSF and said the facility's rating is dependent on its key contributors, including France.
Since being elected as president this spring, Hollande has introduced tax increases to cut France’s budget shortcomings. In September, the leftist government announced its intent to reduce the deficit to 3 percent of GDP in 2013 by introducing 20 billion euros in new taxes on big business and their owners. The president also wants to overhaul France’s job regulations by the end of the year in an effort to combat unemployment which is at a 13-year high.
But the reforms are unlikely to be popular with the public; “in order for the European Union generally and France specifically to reset itself, the economy and the people are going to suffer. There will be significant shocks to their comfort…We will start seeing more protest across France,” Bogengrief beleives.
But Moody’s is not all doom and gloom, it says France still possesses “significant credit strengths,” a “large and diversified economy” and “the government's commitment to structural reforms and fiscal consolidation.”