France’s credit rating cut by S&P to AA

Standard and Poor’s (S&P) has cut France’s credit rating to AA from AA+.

The moves comes almost two years after the country lost its top-rated AAA status.

S&P said it downgraded France because high unemployment in the country was making it hard for the government to make important reforms which would boost growth, the BBC reports.

The French government responded by saying that its debt rating was one of the safest in the eurozone.

S&P said it expected government debt to hit 86% of gross domestic product (GDP) in 2015 and unemployment to remain above 10% until 2016.

The country’s Finance Minister, Pierre Moscovici, said S&P had made “critical and inexact judgements”.

He said in a statement: “During the last 18 months the government has implemented major reforms aimed at improving the French economic situation, restoring its public finances, and its competitiveness.”

In theory, a lower credit rating makes borrowing more expensive.

The return for investors buying French debt indeed did rise after the announcement.

The yield on French government 10-year bonds rose more than 20 basis points to 2.389% from 2.158%.

S&P said in its statement: “We believe the French government’s reforms to taxation, as well as to product, services and labour markets, will not substantially raise France’s medium-term growth prospects and that ongoing high unemployment is weakening support for further significant fiscal and structural policy measures.”

Our business editor, Robert Peston, said S&P was “very publicly criticising France for not doing more to lift its economy out of the economic doldrums and cut persistently high unemployment”.

He said that, coming on the back of yesterday’s decision by the European Central Bank to cut interest rates to almost zero, to ward off the threat of deflation and a return to recession, it was more evidence that the eurozone’s structural weaknesses are far from being fixed.

The French Prime Minister, Jean-Marc Ayrault, said France’s ratings remained among the best in the world and that the agency did not take into account all the reforms made by the government.

However, the downgrade could be the last for some time.

S&P attached a “stable outlook” to France, which implies a less than one-in-three chance that it would change France’s rating over the next two years.