Moody's downgrades France on weak growth

Last updated 12:15 20/11/2012

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Moody's Investors Service has downgraded France's government bond rating, citing the country's weak economic growth outlook and its exposure to Europe's economic crisis.

The rating agency lowered France's rating one notch from Aaa - its top rating - to Aa1. The outlook for the rating remains negative, meaning it could face future downgrades.

Moody's says France's long-term growth outlook is slowing and that it is becoming increasingly difficult to predict how resilient it will be to future euro-area shocks. But the agency noted that the country's rating and the stability of its banks still remain extremely high compared with many other European countries.

Standard & Poor's has an AA-plus rating and negative outlook on France, which it downgraded by one notch in January from AAA. Fitch Ratings has France at AAA, also with a negative outlook.

The loss of an Aaa rating from two agencies poses a problem for France, as investment funds often require their best assets to have a minimum of two top notch ratings in order to remain in their portfolios.

Secondly, borrowing costs could rise for France given it is now not considered as strong a credit risk as before, although the rating is still very high.

"I'm not surprised for two reasons. Rating agencies are trying to beat each other at downgrading everybody but secondly simply because France is paying the price for not engaging in reform," said Axel Merk, president of Merk Investments in Palo Alto, California

"The question is whether it is a wake-up call, or not, and I don't think so; the French are too proud. Some metrics in France have been deteriorating a tad but not enough for stubborn politicians to change course," Merk said.

The euro slid against the US dollar, dropping from a near two-week high after the downgrade to trade off 0.27 per cent to US$1.2777.

"There is probably more downside until the kneejerk reaction is out of the way. But on the whole it seems likely that this more reflects an already existing reality than new information for the market," said Steven Englander, global head of G10 FX strategy at Citi.

- AP and Reuters

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