France Loses Top Rating with Another Agency

A strong illustration of just how bad the European debt crisis is getting, France has lost is top, “Aaa” credit rating with Moody’s Investors Services, moving down one notch and maintaining a dubious “negative” outlook.

France, just over a year ago looked at as a potential debt problem-solver along with Germany, has continued to move backward. But Tuesday's downgrade marks the second in 2012 -- Standard & Poor's made a similar move. With it exposed to various risk thanks to long-time debtor nations to the south, primarily Greece, Spain and Italy, the luster has come off of the European Union’s second largest economy.

Euler Hermes Chief Economist Ludovic Subran said it’s going to be a tough road for most of the EU, especially France, back to a place of strong growth, and that is unlikely to occur anytime soon.

“There will be almost no growth in Europe until 2014 [because of] ineffective economic policies,” Subran noted. He added that Europe is at a crossroads and nothing illustrates the precarious position more than France’s growth stoppage. That would only be topped if Germany’s economic growth and manufacturing activity dropped well below already disappointing recent numbers.

Moody’s justified the downgrade on the following rationales:

  1. France's long-term economic growth outlook is negatively affected by multiple structural challenges, including sustained loss of competitiveness and the long-standing rigidities of its labor, goods and service markets.

  2. France's fiscal outlook is uncertain as a result of its deteriorating economic prospects.

  3. The predictability of 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.

On the positive side, it is worth noting that France remains in a far less negative position then the previously mentioned neighbors, save Germany, and the predicted rate of business bankruptcy there is tracking below the global average. Euler Hermes statistics indicate France's business insolvency rate changes between 2011 and 2012 is tracking to finish at 3%; the Global Insolvency Index (average) for the same period is 4%. Moreover, Euler Hermes' forecast predicts a 2% between this year and 2013 for France, with a global average likely to post at 3%.

-Brian Shappell, CBA, NACM staff writer

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