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Ratings firms sceptical on French reforms

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13:28 CET+01:00
Rating agency S&P took a watch-and-wait attitude to new French economic reforms on Friday, holding an already downgraded notation but with a negative outlook, while giving the benefit of the doubt to the government's determination to enact change.

The S&P decision holding its rating at "AA+" came four days after Moody's cut its top rating for the country by one notch to "Aa1" and warned that more could come.

The latest S&P statement used a slightly more optimistic tone about the outlook for reforms being pursued and enacted than had Moody's.

S&P, which downgraded France from top notch in January, referring to recent French announcements on the economy, said although the government was "determined to carry out budgetary and structural reforms" France's long-term outlook was "negative."

It said: "After flat growth this year, we believe that the French economy will grow by 0.4 percent in real terms in 2013."

This is about half the target of the government which is hoping for growth of 0.8 percent. The European Commission is forecasting growth of 0.4 percent for France in 2013. 

S&P expressed concern over "wavering consumption levels, rising unemployment, and decelerating wages."

But is also said in a significant passage, that it believed "that the French government remains committed to budgetary and structural reforms that would build on the measures it has proposed so far and improve the country's growth potential.

It noted that this month the government had announced a national pact for growth and competitiveness.

Reacting to the statement, French Finance Minister Pierre Moscovici, underscored the government's "resolve" to "follow up on ambitious reforms to help in economic recovery and job creation."

The third main rating agency, Fitch, still gives France a top-notch rating but has said it will take another look at how France is doing.

The head of Fitch, Marc Ladreit de Lacharrière welcomed recent French statements favouring structural reforms and standing by budget targets, but said in remarks to France 2 radio that many investors questioned "the credibility" of action to balance the budget in 2017.

However in a slight boost for France, the second-biggest economy in the Eurozone after Germany, its borrowing rate fell to 2.161 percent in morning trading after the announcement. It had stood at 2.181 percent at close on Thursday.

Reforms "insufficient"

The International Monetary Fund, the European Commission, and leading voices in Germany have all warned France that it must catch up with deep structural reforms to its economy, as do analysts on financial markets where France borrows to fund its public deficit and debt.

The S&P statement said: "Our baseline expectation is that the government will press ahead with further important structural reforms, despite opposition from vested interests which benefit from long-entrenched entitlements.

Substantial reforms would underpin the government's fiscal consolidation strategy, in our view, and improve economic growth prospects."

But it also said that reforms, announced in recent weeks, to spur the competitiveness of French industry, including a corporate tax credit for firms' payrolls, were "useful but insufficient to significantly unlock economic growth potential."

The statement said that "labour and service-sector reforms would be positive for competitiveness, economic growth, and, in turn, sovereign creditworthiness."

The agency also said that France's tax burden was high at "more than 46 percent of GDP over 2012-2015 ... while we project general government spending will stay above 56 percent of GDP (gross domestic product) over the same period, the highest in the eurozone."

It said there was a one-in-three chance the rating could be lowered next year if growth prospects deteriorated further or reforms failed to overhaul the labour market, or if France's general government deficit stayed close to current levels.

The issue of confidence in French economic policy, widely seen as having changed direction more towards reform in recent months, is vital if the country is to be able to continue borrowing at record low levels of about 2.0 percent. This is not much above the rate at which Germany borrows.

One key policy target is for France to reduce its public deficit to within EU limits.

France has not run a balanced budget since the 1970s.

Moody's said earlier this week that although recent announcements in France went in the right direction, a legacy of 20 years of difficulty by successive governments in reforming the economy hung over the outlook.

The economy has been stumbling along at almost zero growth for about a year but in the last quarter rallied to show a gain of 0.2 percent, the same level as in Germany where the economy had been resilient but has been hit by a slowdown in business activity.

French industrial confidence rose marginally in November from October, when it had hit a three-year low, the national statistics office said on Friday.

The composite industrial sentiment index rose by three points from last month when it stood at 85 points, moving further from its long-term average of 100 points.

Ratings are vital tools for vast sectors of the financial and investment industries since they assist investors in categorising investments by class of risk.

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