Fitch warns France over credit rating in face of deficit dilemma

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Fitch warns France over credit rating in face of deficit dilemma

Fitch warns France over credit rating in face of deficit dilemma
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Another blow for the French government as the ratings agency Fitch warned it may cut France’s credit rating.

The double A plus rating on French bonds has now been placed on negative watch, with Fitch citing risks to growth and deficit-reduction plans.

“The quantitative impact of recent structural reforms is … uncertain, and in Fitch’s view does not appear sufficient to reverse the trends in long-term growth and competitiveness,” Fitch said, explaining its decision.

The announcement means it is more likely to downgrade France at its next review.

Fitch, which sees French economic growth at 0.4 percent in 2014 and 0.8 percent in 2015, added that its next decision would be published on December 12.

Finance Minister Michel Sapin responded that the country had suffered from a “difficult” European context and lower-than-expected growth, but would pursue deficit-reduction efforts and carry out reforms to improve the competitiveness of French companies.

Deficit dilemma

President Francois Hollande has said that the country will not be able to cut its public deficit to within European Union targets as soon as planned because of weak growth and low inflation.

On Wednesday after France presented a draft 2015 budget breaking past commitments to rein its deficit back to within EU limits of three percent of output.

Paris argues that more austerity would be counter-productive and that it should have two more years to master its deficits while the EU boosts investment to chase growth.

The outgoing European Commission of Jose Manuel Barroso now has to decide whether to send back the draft by the end of the month and ask Paris to come up with an improved budget.

“Sending back a budget is a strong gesture, it is a major act, a huge political sanction,” one EU source said.

Such a decision would be unprecedented and would give France until end-November to come up with new figures and offer evidence that it is willing to revamp a stagnant economy barely able to create jobs and saddled with a widening trade deficit.

Reforms face tough ride

Economy Minister Emmanuel Macron on Wednesday presented the broad outlines of a well-flagged law aimed at de-regulating sectors running from long-haul bus transport to the legal professions, while making Sunday trading easier.

However, the law itself is not due to come into effect until early 2015 and will in the meantime face tough resistance from lobby groups seeking to water down its provisions.

Brussels remains sceptical as to whether the Macron plan would be sufficient but suggested it could help break the stalemate after the modest labour and pension reforms put in place by the Hollande government since 2012.

France’s jobs market, with its high level of worker protection and hugely complex labour code, is coming under special scrutiny from Brussels as a brake on the country’s competitiveness.

A lowering of France’s minimum wage and extra efforts to help workers shift from declining sectors into new ones are among the moves Brussels would welcome, the EU source said.

with Reuters