Moody's Investors Service on Monday stripped France's of its coveted triple A rating with a one notch downgrade, in yet another blow to President Francois Hollande whose popularity has been diminishing amid the country's economic gloom and rising unemployment.
The government bond rating on the Eurozone's second largest economy was cut to Aa1 from Aaa, while the rating outlook was maintained at 'negative.'
France lost its top rating at Standard and Poor's in January along with eight other euro area members.
Moody's said that the first driver underlying Moody's one-notch downgrade of France's sovereign rating was "the risk to economic growth and to the government's finances, posed by the country's persistent structural economic challenges."
"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 service markets," it said.
The deteriorating economic prospects has turned France's fiscal outlook "uncertain" while the rising risks to economic growth, fiscal performance and cost of funding have diminished the predictability of France's resilience to future euro area shocks.
France's exposure to peripheral Europe through its trade linkages and its banking system is disproportionately large. Moody's noted that while its contingent obligations to support other euro area members have been increasing, unlike other highly-rated non-euro area sovereigns, France does not have access to a national central bank for the financing of its debt in the event of a market disruption.
Moody's said the government's recently announced measures alone are unlikely to be sufficiently far-reaching to restore competitiveness and the track record of successive French governments in effecting such measures over the past two decades has been poor.
In his first annual budget presented in September, Hollande raised taxes on the rich and big companies while cutting spending by EUR 10 billion to reduce the deficit to 3 percent in 2013.
The French economy expanded 0.2 percent quarter-on-quarter in the third quarter, the latest figures from the statistical office Insee has revealed. The economy contracted 0.1 percent in the second quarter.
The French government forecasts 0.8 percent growth for the economy next year, while the European Commission predicts just 0.4 percent growth in 2013 following an estimated 0.2 percent expansion this year.
by RTT Staff Writer
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