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France's credit rating downgraded by S&P over slow reforms

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France's credit rating downgraded by S&P over slow reforms
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Another setback for the French government as the rating agency Standard & Poor’s cut its appraisal of the country’s credit worthiness. It reduced its rating one notch to AA from AA+.

That was a thumbs-down to President Francois Hollande’s efforts to get the eurozone’s second largest economy back on track.

French Finance Minister Pierre Moscovici denounced the downgrade saying: “They’re underestimating France’s capacity to transform itself, to recover. You need to look at other indicators that I think are more important – the European Commission says we’ve come out of recession this year with 0.2 percent growth, we will have 0.9 percent growth in 2014 and most importantly in 2015 1.7 percent growth. France is on track for a solid, credible recovery and that’s what the government is working on.”

Standard & Poor’s was the first major agency to strip France of its AAA rating last year. The other two – Moody’s and Fitch – then followed.

However, S&P has France’s outlook as “stable,” which means no further changes expected in the near term.

David Thesmar, Professor of Finance at the HEC business school in Paris, believes the country is safe for now: “If France enters the higher risk categories, refinancing would be a problem within months, but we’re a long way from that.”

S&P said high unemployment – currently at 11.1 percent – will make necessary reforms nearly impossible for President Hollande’s government. And without reforms, it will have difficulty in significantly reducing spending.

Reaction in bond markets was muted. France’s cost of borrowing increased only very slightly, demonstrating how investors are getting used to downgrades of European governments.