MercoPress. South Atlantic News Agency

S&P downgrades France's credit rating but market reactions were contained

Finance Minister Pierre Moscovici denounced the downgrade.

Another setback for the French government as the rating agency Standard & Poor’s cut its appraisal of the country’s credit worthiness. It reduced its rating one notch to AA from AA+.

 That was a thumbs-down to President Francois Hollande’s efforts to get the Euro-zone’s second largest economy back on track. French Finance Minister Pierre Moscovici denounced the downgrade.

“They’re underestimating France’s capacity to transform itself, to recover. You need to look at other indicators that I think are more important – the European Commission says we’ve come out of recession this year with 0.2% growth, we will have 0.9% growth in 2014 and most importantly in 2015, 1.7% growth. France is on track for a solid, credible recovery and that’s what the government is working on.”

Standard & Poor’s was the first major agency to strip France of its AAA rating last year. The other two – Moody’s and Fitch – then followed.

However, S&P has France’s outlook as “stable,” which means no further changes expected in the near term.

David Thesmar, Professor of Finance at the HEC business school in Paris, believes the country is safe for now: “If France enters the higher risk categories, refinancing would be a problem within months, but we’re a long way from that.”

S&P said high unemployment – currently at 11.1% – will make necessary reforms nearly impossible for President Hollande’s government. And without reforms, it will have difficulty in significantly reducing spending.

“We believe the French government's reforms to taxation, as well as to product, services and labor markets, will not substantially raise France's medium-term growth prospects and that ongoing high unemployment is weakening support for further significant fiscal and structural policy measures” added S&P.

Reaction in bond markets was muted. France’s cost of borrowing increased only very slightly, demonstrating how investors are getting used to downgrades of European governments.