PARIS (MNI) – The following is the verbatim text published by
Moody’s, outlining the rating agency’s credit opinion of the government
of France:
Opinion
Credit Strengths:
The credit strengths of France include:
– A large, wealthy, and diversified economy
– Robust institutions and competent administration
– Strong social cohesion
– Sound and innovative debt management
– Important reform initiatives, especially in the public sector and the
pension system
Credit Challenges:
The credit challenges of France include:
– Relatively high government expenditure
– Relatively large government deficit and debt in relation to GDP
– Exposure to potential new contingent liabilities arising from further
deterioration in the European debt crisis
Rating Rationale
The French government’s Aaa rating reflects the French economy’s
strength, the robustness of its institutions and very high government
financial strength. France’s sustainable GDP growth has been supported
by the economy’s large size, high productivity, broad diversification
and its track record for innovation together with high private sector
savings and an only moderate built-up of household and corporate
liabilities. As demonstrated by the resilience of domestic demand during
the global crisis, these features provide ample capacity to absorb
shocks, although some exogenous risk factors like the subdued prospects
for global economic growth and the eurozone debt crisis, continue to
constrain medium-term economic performance.
The country’s institutional framework’s robustness and transparency
is based on the high degree of expertise and accuracy France displays in
providing statistical, macroeconomic, budgetary and judicial services.
Moreover, the government has in the past demonstrated the ability to
pass controversial legislation necessary to limit future public
expenditure to maintain the sustainability of its long-term debt-to- GDP
ratio.
The government’s financial strength has weakened, as it has for
other euro area sovereigns, as the global financial and economic crisis
has led to a deterioration in French government debt metrics – which are
now among the weakest of France’s Aaa peers. Financial strength is
nonetheless still deemed to be very high, particularly when compared
with debt affordability (interest burden in relation to government
revenues) which remains very comfortable. But very high debt
finance-ability in an uncertain financial and economic environment,
which is a crucial feature of Aaa governments, rests on investors’
confidence in the government’s ability and willingness to tackle
unforeseen challenges. France – like other eurozone sovereigns – may
face a number of challenges in the coming months. The need to provide
additional support to other European sovereigns or to its own banking
system cannot be excluded. In that case this could give rise to
significant new (contingent) liabilities for the government’s balance
sheet.
Rating Outlook
The deterioration in debt metrics and the potential for further
contingent liabilities to emerge are exerting pressure on the stable
outlook of the French government’s Aaa debt rating. The French
government now has less room for manoeuvre in terms of stretching its
balance sheet than it had in 2008. After multiple financial and economic
support measures, the government is now forced to consolidate public
finances at a critical moment for economic growth. Relatively high
levels of indebtedness, very high government expenditure in relation to
nominal GDP and important structural fiscal deficits constrain the
capacity for the government to respond to future shocks and weigh on the
government’s financial strength.
The domestic and external economic growth outlook presents
significant risks to the French government’s fiscal consolidation plans,
and the French government has already reacted by introducing further
fiscal measures to meet medium term fiscal targets. Domestically, fiscal
austerity measures – even though designed to minimize any potential
adverse impact on economic growth – will lead to some increase in
already high tax pressure which can weigh on economic growth dynamism.
Should growth falter, the government’s ability to pursue further fiscal
austerity and economic reform measures to meet deficit reduction targets
will be tested. On the external front, the simultaneous fiscal
consolidation process across France’s major trading partners in the euro
area is another potential drag on growth.
More generally, the management of the euro area debt crisis
complicates the government’s fiscal consolidation efforts. The longer
the sovereign and bank funding markets remain volatile, the more likely
it is that further credit pressures will develop for most euro area
countries, including Aaa-rated countries such as France. As indicated in
October 2011, Moody’s is assessing the stable outlook on France’s Aaa
rating. We will update the market during the first quarter of 2012 as
part of the initiative to revisit the overall architecture of our
sovereign ratings in the EU, as first announced in November 2011.
What Could Change the Rating – Down
France’s continued commitment to implementing the necessary
economic and fiscal reform measures as well as visible progress in
achieving the targeted sustainability improvements will be important for
the stable outlook to be maintained.
The Aaa rating of the French government may come under pressure if
general government debt in relation to nominal GDP continues to
accumulate without signs of stabilizing at a highly affordable level.
Alternatively, adverse economic or financial market developments would
also pressure France’s credit rating, including a further deterioration
in the European debt crisis that has direct implications for the French
government operating balance or financial position, a requirement for
further support to neighbouring euro area member states, or increased
exposure to contingent liabilities from the national banking system.
Recent Developments
In November the government announced additional fiscal austerity
measures of EUR 17.4 billion to offset its weakening GDP growth outlook
and remain on track to achieve its fiscal targets. This was in addition
to the fiscal measures announced on 24 August, which included the
introduction of an additional tax on fiscal revenues deriving from high
incomes, a ceiling on employers’ exemptions from social contributions
for overtime work, a further reduction of tax credits, the introduction
of adjustments in the taxation of real estate and corporate and an
increase in the taxes on tobacco and alcohol.
The government aims to reduce the general government deficit ratio
to 3% in 2013 from 7.1% in 2010 and to achieve a balanced budget by
2016. Its plans imply EUR 115 billion of overall fiscal correction for
the 2007-16 period. That announcement, the second budgetary correction
since summer, attests to the government’s credit positive commitment to
control public finances, provided measures are fully implemented and do
not undermine economic growth. However, the outlook for economic growth
and the European debt crisis–both of which are outside the full control
of the government–are important risk factors for the government’s
balance sheet.
Its bonds’ status as benchmarks in the euro market allowed the
French government to borrow at such low costs even during the worst
moments of the global financial and economic crisis. The French Treasury
was able to lock in very low, medium- and long-term borrowing costs in
2009, 2010 and 2011 at average interest rates below 3%. However, in a
very volatile market environment, managing investors’ expectations has
become more challenging and will also depend on the achievement of
fiscal consolidation targets. In the hypothetical case of elevated
borrowing costs persisting for an extended period, this would amplify
the fiscal challenges the French government faces amid a deteriorating
growth outlook. However, the prevailing rate for 10-year French
government bonds (OAT) at the start of December is still moderate and
substantially below the 4.15% historical average.
[TOPICS: M$$CR$,M$X$$$,M$$EC$,MI$$$$,MMUFE$,MT$$$$,M$F$$$]
