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France Credit Rating Slumps

France Credit Rating SlumpsFrance Credit Rating Slumps

Ratings agency Fitch cut France's credit grade by one notch to "AA" on Friday, saying Paris's efforts to trim its fiscal deficit have fallen short to avoid a downgrade.

"The weak outlook for the French economy impairs the prospects for fiscal consolidation and stabilizing the public debt ratio," AFP quoted Fitch report as saying.

The AA grade – two steps below the top triple-A rating – was decided despite France having reduced its projected deficit for fiscal 2015 to 4.1 percent of GDP, down from 4.3 percent, under pressure from the European Commission.

"On its own, this will not be sufficient to significantly change Fitch's projections of France's government debt dynamics," the agency said.

"The 2015 budget involves a significant slippage against prior budget deficit targets." It noted that the draft 2015 budget projected government debt to GDP ratio will peak at 98 percent in 2016, higher and later than previous projections.

But Fitch doubted those targets could be met. "Even under the official forecast, the capacity of the public finances to absorb shocks has been significantly reduced," it said.

"Fitch expects the debt to GDP ratio to peak higher at close to 100 percent of GDP, with a slower decline to 94.9 percent of GDP by the end of the decade."

The agency said the outlook for the rating was stable, envisaging no downgrade (or upgrade) in the next several months.

Economy Risk

But it said its own fiscal projections for the eurozone's second largest economy risk being overoptimistic in part "owing to the uncertain outlook for GDP growth and inflation in the near term."

Secondly, it cited "increased uncertainty over the government's ability to deliver on a fiscal consolidation path."

"Reflecting these concerns, Fitch's medium-term growth forecasts are somewhat weaker and budget deficits wider than official projections," the agency added.

French Finance Minister Michel Sapin said in response to the downgrade that the government was narrowing its budget gap while supporting growth.

"In a difficult economic environment in Europe, the government is sticking to its path... pursuing the reforms necessary to strengthen growth and make businesses more competitive," he said in a statement.

"The policy has begun to produce results, with companies benefiting from the initial effects of tax reductions, which will continue in the coming years."

With an economy that has barely grown for three years and a budget deficit that’s rising for the first time in half a decade, President Francois Hollande faces increasing pressure from France’s European partners to accelerate economic modernization to spur the nation’s economic recovery.

“In some policy areas reforms are progressing, but there remains uncertainty on their expected outcomes and their effectiveness,” the European Commission said Dec. 11. “Further reform efforts are needed.”

Reforms

French Prime Minister Manuel Valls has announced reforms aimed at boosting the economy and combating unemployment.

The plans include increasing the number of businesses operating on Sundays and opening up regulated sectors to competition, BBC said.

Thousands of opponents demonstrated in Paris in response.

Critics say the measures go against the political beliefs of the country's left-wing government.

On Wednesday, Valls acknowledged stiff resistance to the plans from within the ruling Socialist Party, remarking that the planned reforms were "more popular with the French voters than with some in public life".

 

Financialtribune.com