Moody’s Cuts France from Triple-A Team

The number of members on the tripe-A team continue to dwindle. Late Monday, Moody’s Investors Service (NYSE:MCO) downgraded France’s credit rating one notch to Aa1 from AAA. Furthermore, the ratings agency said its outlook on the eurozone’s second largest economy remains negative, which will likely lead to more downgrades in the future.

Fitch is now the only ratings agency that has a triple-A rating on French debt, as Standard & Poor’s (NYSE:MHP) downgraded France in January to AA-plus, and currently has a negative outlook on the country.

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Moody’s decision to downgrade France and maintain a negative outlook boils down to the three key interrelated factors listed below from the company’s official statement.

1. 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.
2. France’s fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand, and in the longer term due to the structural rigidities noted above.
3. The predictability of France’s resilience to future euro area shocks is diminishing in view of the rising risks to economic growth, fiscal performance and cost of funding. France’s exposure to peripheral Europe through its trade linkages and its banking system is disproportionately large, and its contingent obligations to support other euro area members have been increasing. Moreover, unlike other non-euro area sovereigns that carry similarly high ratings, France does not have access to a national central bank for the financing of its debt in the event of a market disruption.

As Citigroup (NYSE:C) FX strategist Steven Englander points out, the dire conditions in France and other debt-ridden nations are nothing new. He explains, “As with the U.S. downgrade last year, little of what they cite is new and the downgrade reflects a reality that has probably long applied to France and applies to a number of the remaining Aaa countries as well.”

Moody’s explains that given the current negative outlook on France’s sovereign rating, investors should not expect an upgrade anytime soon. However, the ratings agency would consider changing its outlook to stable “in the event of a successful implementation of economic reforms and fiscal measures that effectively strengthen the growth prospects of the French economy and the government’s balance sheet.”

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