French finance minister shrugs off country's credit rating downgrade, insisting its economy just 'needs time'

  • Moody's Investors Service stripped Europe's second largest economy of it of its prized AAA credit rating
  • Second ratings downgrade to have hit France this year: Standard & Poor's agency lowered its score in January

By Daily Mail Reporter

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Finance Minister Pierre Moscovici insisted the government's plan to reduce unemployment and restore growth would bear fruit

Finance Minister Pierre Moscovici has insisted the government's plan to reduce unemployment and restore growth would bear fruit

France's government has shrugged off the latest downgrade of its credit rating, saying that it just needs time for reforms to the sluggish economy to take root.

In a setback for President Francois Hollande's Socialist administration, Moody's Investors Service stripped Europe's second largest economy of it of its prized AAA credit rating yesterday over concerns that its rigid labour market and exposure to Europe's financial crisis were threatening its prospects for economic growth.

This is the second ratings downgrade to have hit France this year: Standard & Poor's agency lowered its score in January.

The third leading agency, Fitch, still ranks France at the AAA-rating but warned it could still be downgraded.

Finance Minister Pierre Moscovici insisted that France's credibility remains strong and that the government's plan to reduce unemployment and restore growth would bear fruit.

France has come under scrutiny as its £1.6trillion economy has stagnated, with many leading French companies laying off workers.

Meanwhile, Hollande has struggled to reassure economists that his attempts to revive the French economy will be successful.

Hollande's administration has laid out a series of deficit-reduction targets, vowing to bring it in line with European rules next year.

It has also unveiled a plan to improve the competitiveness of its economy, by giving companies £18billion in tax rebates, reducing red tape for businesses, and providing small companies with extra support to compete abroad.

However, many economists say that the greatest threat to France's economy is its stringent labour rules, which make firing difficult and expensive and thus deter hiring.

 

The country has been losing global business for years to more dynamic economies like China's, while fighting unemployment of 10.8per cent and concerns about the future of the eurozone.

The French government is currently leading negotiations between businesses and unions in the hopes of reforming labour rules by the end of the year.

Moscovici pleaded for time today, arguing that the government had inherited a difficult economic and budgetary situation from former President Nicolas Sarkozy. He said the government is convinced it is now on the right path but that its reforms just need to take effect.

'It takes time to reverse the flow of things. It takes courageous decisions, and that's what we're promising to do,' he told reporters.

To the ratings agencies, critics and investors, he said: 'Judge us on our results.'

Rating blow: Borrowing costs could rise for France given it is now not considered as strong a credit risk as before

Issue: France has been losing global business for years to more dynamic economies like China's, while fighting unemployment of 10.8per cent and concerns about the future of the eurozone

France and Germany, which underpin the group of 17 European Union countries that use the euro, have taken the lead in finding solutions to the continent's debt crisis. Any slip in France's clout could endanger its ability to lead negotiations.

In an early sign of how the rating could affect the eurozone ability to solve its financial crisis, its bailout fund was forced to cancel a bond auction today.

Officials with the European Financial Stability Facility said the downgrade caused a technical problem since the EFSF's rating is now higher than that of France, which is a major backer of the fund.

EFSF CFO Christophe Frankel did not say how the glitch would be resolved but said he thought it was a possibility.

The EFSF has been replaced by the European Stability Mechanism, but is still handling the bailouts of Greece, Ireland and Portugal.

Moscovici also insisted that relations with Germany remained strong. There have been reports recently that Germany is concerned about the health of the French economy.

But German Finance Minister Wolfgang Schaeuble seemed unconcerned about the downgrade.

'We have received the news that, overnight, our most important partner got a little admonition from a rating agency,' Schaeuble said in the German Parliament. 'The rating for France is still very stable, so that we avoid any dramatisation.'

Union workers hold a Poster reading 'Austerity for salairy and Pensions, Enough' during protest against austerity measures and unemployment in Paris in January

Many leading French companies have laid off workers as the economy stagnates. Here union workers hold a Poster reading 'Austerity for salary and Pensions, Enough' during a protest in January

Moody's itself said that the rating remains as high as it does - now Aa1, just a notch below triple-A -because of the size of the French economy and the government's commitment to make structural reforms. It kept the rating's outlook at negative, meaning it could face future downgrades.

The downgrade, like S&P's before it, appeared to be having a limited effect on France's borrowing costs. The yield, or interest rate, on the benchmark 10-year bond was up 0.05 percentage points to 2.01 per cent this afternoon. Germany's was up the same rate to 1.39 per cent.

Moscovici said he expected the country to continue to be able to borrow at those historically low rates because of the seriousness of its reform package.

Analysts warned, however, that French banks could next face downgrades, since they are significant holders of French government debt and ultimately backed by the government.

Lee McDarby, analyst at Investec Corporate Treasury, said: 'The move was widely expected by markets but still proves a blow to France's new government headed by Francois Hollande, who will face increased pressure to find ways to generate growth.'

The Dow Jones Industrial Average was slightly down as US investors were mellowed by the mood in Europe.

 

The comments below have not been moderated.

Credit rating agencies are just another American scam. They gave some banks top ratings just before they collapsed. The French are right to ignore them and I hope the rest of the world follows suit.

Click to rate     Rating   4

He's right. Each year French 'farmers' get topped up from the common agricultural fund. Collectively, their take equates to an annual bonanza that competes with Britain's income from the concession holders of the north sea oil fields. Some of the 'farmers' are also 'fishermen,' or their families are, so they also enjoy compensation for limitations imposed on their fishing activities; that's in addition to the 'new boats for old' policy. Some of the farmers, who are also fishermen, ALSO have full time jobs OUTSIDE of farming and fishing, Some of the 'farmers' who are also 'fishermen' and have full time jobs outside of farming and fishing are employed within the French public sector. If that sounds as if they've found Aladins Lamp, they have. It's called the EU. Is it any wonder why the EU commissioners fear the word 'Audit,' whilst a French minister can shrug off the AAA rating?

Click to rate     Rating   6

I am certainly not an economist but surely no matter how big your economy is you cannot sustain lending billion euro loans out to countries and get a penny back. Germany beware !

Click to rate     Rating   5

He may be right. Given their attitude to boycotting anything produced outside France compared to our English attitude they probably have a better chance than us.

Click to rate     Rating   3

The French Finance Minister said that they need a little more time to overcome the problems left to them by Sarkosy. I am sure that, as soon as he came into office, M Hollande diluted the measures which Sarkosy had begun to put in place to help the French economy. You can't have it both ways Monsieur.

Click to rate     Rating   8

He's right, the French economy just needs time before it becomes just like Greece.

Click to rate     Rating   23

And why not. If you don;t like it just ignore it and it will go away or blame the British and go on strike. Eh biennos amis?

Click to rate     Rating   14

Hollande's plan to reduce unemployment is similar to the one Gordon Brown used here: he wants to hire hundreds of thousands to work for the government and tax everyone to death. When are socialists going to learn that you can't tax your way to prosperity. Moscovici and Schauble arrogantly dismiss the downgrade by the ratings agencies as insignificant but they lie. Secretly they are panicking. Buying worthless sovereign bonds with equally worthless fiat euros will eventually lead to the implosion of the system. Institutional investors forced to buy the worthless bonds are going to hedge against losses and go short on the bond market. At this point the Ponzi scheme will collapse and it will be bye-bye to the EU. Ha ha ha ha, ha ha ha ha.

Click to rate     Rating   20

Err, I think it was "time" that caused the credit rating problem A little more time and it will most certainly drop again

Click to rate     Rating   13

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