12 July 2013

Fitch downgrades France to 'AA+'; outlook stable

The downgrade of France's foreign and local currency IDRs reflects the following key rating drivers and their relative weights:

High

• Fitch now forecasts general government gross debt (GGGD) to peak higher at 96 per cent of GDP in 2014 and decline only gradually over the long term, remaining at 92 per cent in 2017. This compares with Fitch's previous projections in December 2012 of GGGD peaking at 94 per cent (and 92 per cent when it first revised the Outlook to Negative in December 2011), and declining more rapidly to below 90 per cent by 2017.
• The agency commented at the time of its previous rating review that this was the limit of the level of indebtedness consistent with France retaining its 'AAA' status assuming debt was firmly placed on a downward path from 2014. Its projections for France's GGGD ratio are significantly higher than the 'AAA' median of 49 per cent and 'AA' median of 27 per cent. The only 'AAA' country with a higher debt ratio is the US (AAA/Negative), which has exceptional financing flexibility and debt tolerance afforded by the preeminent global reserve currency status of the US dollar.
• Risks to the agency's fiscal projections lie mainly to the downside, owing to the uncertain growth outlook and the on-going eurozone crisis, even assuming no wavering in commitment to fiscal consolidation. A debt ratio that is higher for longer reduces the fiscal space to absorb further adverse shocks.

Medium

• Economic output and forecasts are substantially weaker than when Fitch revised the Outlook to Negative. The unemployment rate has also jumped to a 15 year high of 10.9 per cent in May 2013. The weaker economic outlook is the primary factor behind increases in the budget deficit and France remaining in the EU's Excessive Deficit Procedure for a year longer. Fitch expects the French economy to recover less quickly then official projections, owing to headwinds from subdued external demand, weaker competitiveness, high unemployment and fiscal consolidation. Its latest forecasts are for GDP to contract in 2013 before growing by 0.7 per cent in 2014.
• As well documented by organisations such as the OECD, IMF and European Commission, the French economy faces a number of structural challenges, including gradually declining competitiveness, weak profitability and rigidities in the labour, goods and services markets, which weigh on the medium term outlook. Fitch's projection for long term potential growth is broadly unchanged at around 1.5 per cent.
• France's current account was in a deficit of 2.3 per cent of GDP in 2012. Although that is not especially high, it has deteriorated steadily from surpluses a decade ago, reflecting a steady loss of competitiveness and export market share. This evolution has been mirrored by the rise in net external debt which has risen to 25 per cent of GDP, compared with the 'AAA' median of 20 per cent.

Despite the loss of its 'AAA' status, France's extremely strong credit profile is reflected in its 'AA+' rating with a Stable Outlook, which reflects the following main factors.

• France's wealthy and diversified economy and political stability entrenched by strong and effective civil and social institutions.
• Fitch judges financing risk to be very low reflecting an average debt maturity of seven years, low borrowing costs and strong financing flexibility underpinned by its status as a large benchmark eurozone sovereign issuer.
• France has a track record of relative macro-financial stability including low and stable inflation. It also benefits from moderate levels of household indebtedness and a high household saving rate.
• Since coming into office last year the Socialist government has set out and started to implement a wide-ranging programme of structural reforms, including the "National Compact for Growth, Competitiveness and Jobs" and recent labour market reforms. This may help improve the long term growth and current account position. However, the quantitative impact of the new measures is uncertain and reforms are subject to implementation risk.
• The recent structural reform of the budget procedure through the organic law that transposes the EU Fiscal Compact into national law will strengthen the confidence in the outlook for French fiscal policy. As part of the reforms an independent body, the High Council of Public Finances was created with the role to give an opinion on the growth forecasts underpinning budget forecasts. It will also monitor the government's compliance with the multi-annual planning law and will be charged with identifying and making public any major budget slippage.
• Risks in the French banking system have eased as asset quality, funding and capitalisation have improved, though exposures to Italy remain significant.

Full press release

Pierre MOSCOVICI takes note of the decision by Fitch and reiterates the robustness of France’s sovereign creditworthiness

Pierre Moscovici, French Minister for the Economy and Finance, has been informed of the decision by Fitch Ratings Agency to downgrade France’s long-term sovereign rating to “AA+”, stable outlook, while maintaining the highest rating for the country’s short-term rating (F1).

This high rating and the stable outlook reflect France’s well-known strengths, including its large and diversified economy, growing population, strong productivity levels, high-quality infrastructure and public services, robust institutions, especially in the financial sector, and benchmark status within the euro area for sovereign bond issues. The rating also mirrors the importance of the structural reforms underway, particularly the National Pact for Growth, Competitiveness and Employment, the law reforming the labour market, initiatives to modernise public services and reforms to the pension system. Lastly, according to Fitch, the stable outlook is based on the reduction in the banking sector’s risk exposure and an easing in the euro area sovereign debt crisis.

French sovereign debt securities are among the safest and most liquid within the euro area. Their historically low interest rates are proof of investor confidence, which in turn underpins the government’s conviction that it is on the right strategic path.

Pierre Moscovici reiterates the government’s determination to press ahead with fiscal consolidation, renewing France’s international competitiveness and getting the economy back on track to boost growth and employment.

Press release

© Fitch, Inc.