Paris (AFP) – France, and the eurozone’s fragile recovery, were thrown on the back foot on Friday when rating agency Standard and Poor’s downgraded French debt by one notch, but the government reacted with defiance.
Standard and Poor’s said in strong terms that high debt, taxes and unemployment were squeezing the government’s room for manoeuvre and that deeper structural reforms were urgently needed.
But S and P held steady its ratings of leading French banks.
The announcement pushed up France’s 10-year borrowing rate and depressed French stocks.
The critically important 10-year bond yield rose to 2.391 percent from 2.158 percent late on Thursday.
The downgrade to “AA” from “AA+” came three days after the European Commission warned that France was in danger of overshooting its promises to cut its public deficit.
“The downgrade reflects our view that the French government’s current approach to budgetary and structural reforms to taxation, as well as to product, services and labour markets, is unlikely to substantially raise France’s medium-term growth prospects,” S and P said.
“Moreover, we see France’s fiscal flexibility as constrained by successive governments’ moves to increase already-high tax levels, and what we see as the government’s inability to significantly reduce total government spending,” it said.
French president Francois Hollande responded with defiance, saying that he would stick to his “strategy” and hold his course on economic policy.
Finance Minister Pierre Moscovici deplored “the critical and inexact judgements” made by the agency.
And Prime Minister Jean-Marc Ayrault said that the decision “does not take into account all the reforms” made by the government.
S and P was sceptical that these reforms were enough, but it said that the outlook was stable, noting that the French economy had several underlying strengths.
Copyright 2013 The National Memo