France lost its top credit rating with Moody’s Investors Service, dealing a blow to President Francois Hollande’s efforts to show budget credibility in the face of a stalled economy.
France was cut to Aa1 from Aaa, the rating company said Monday. The Moody’s downgrade follows one by Standard & Poor’s in January and increases pressure on Hollande to find ways to bolster growth in Europe’s second-largest economy in the midst of the region’s three year-old debt crisis.
Moody’s said its decision to downgrade the rating and maintain the negative outlook reflects France’s long-term economic growth outlook is negatively affected by multiple structural challenges and the fiscal outlook is uncertain as a result of its deteriorating economic prospects.
Since taking office in May, Hollande has pressed Germany to do more to end the debt crisis, while focusing on tax increases at home to pare France’s budget shortfall. Last month, his government has set out 20 billion euros in new levies on the rich and big companies that are intended to reduce the deficit to 3 percent of gross domestic product next year.
Buffeted by the European Central Bank’s offer to help finance struggling governments under certain conditions, Hollande has so far received support from his investors even after the S&P downgrade.
French borrowing costs have tumbled since he took office, with the yield on the nation’s benchmark 10-year debt dropping to a record-low of 2 percent on Aug. 3 and shorter-term notes selling at negative yields for the first time in July. French 10-year bonds yielded 2.07 percent today.
Yet with an economy that has failed to grow in three quarters and unemployment at a 13-year high, Hollande needs to act quickly to address France’s lack of competitiveness by improving labor market flexibility and lowering wage costs, economists say.
Hollande said Sept. 9 that he wants unions and business leaders to agree on an overhaul of France’s job regulations by the end of the year or he’ll impose one himself.
“If this historic compromise is reached by year end, this reform will be given the force of law,” Hollande said on TF1 television. “But if the partners can’t agree, then I’m sorry, but then the state will assume its responsibilities.”
Hollande gave himself a two-year window to fix the French economy, repeating pledges to reduce the deficit and hold down spending. The nation’s debt burden will peak at 91 percent of GDP next year, the 2013 budget estimates.
“We expect the government to come forward with proposals on the labor market, competitiveness and the financing of the economy towards year end,” said Fabrice Montagne, an economist at Barclays in Paris. “Structural reforms are a necessity as they deliver high long-term growth per-capita, ensuring that short-term fiscal slippage does not threaten debt sustainability.”
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