International Economics

Top Credit Agency Downgrades French Credit Rating

|

In September of this year, French President Francois Hollande unveiled a budget proposal designed to cut the country's annual budget deficit down to 3 percent of gross domestic product from its current 4.5 percent.

The main mechanism for closing the gap? Tax hikes on businesses and the wealthy, including a 75 percent tax on anyone earning over a million euros annually, as well as additional taxes on capital gains and dividends. The budget cut little in the way of public spending, however, and didn't make signfiicant reductions in the public sector workforce. 

Top credit ratings agency Moody's isn't impressed. It just cut France's top credit rating, according to Bloomberg:

France lost its top credit rating at Moody's Investors Service, which also maintained a negative outlook for Europe's second-largest economy, citing what it called a worsening growth outlook.

France was cut to Aa1 from Aaa, the rating company said yesterday. The Moody's downgrade follows one by Standard & Poor's in January and increases pressure on President Francois Hollande to find ways to bolster growth.

"France's fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand" and "structural rigidities" in the longer term, Moody's said in a statement in Frankfurt.

Standard & Poor's kicked France's credit rating down a notch in January, so this isn't entirely unexpected. It is, however, a reminder of the dim prospects for growth in France, where unemployment is currently higher than it's been in more than a decade. Via The Guardian:

Defending the downgrade, Moody's stated: "France's long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and the service markets.

"France's fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term, due to subdued domestic and external demand, and in the longer term due to the structural rigidities noted above."

Officially, French public debt hit 91 percent of GDP this year, which is the level at which many economists say that debt has the potential to becomes a serious drag on a nation's economy. The U.S. is on track to follow, with public debt projected to hit 90 percent of GDP in the next decade under the Congressional Budget Office's alternative fiscal scenario.