Frankfurt am Main, November 19, 2012 -- Moody's Investors Service has today downgraded France's government bond
rating by one notch to Aa1 from Aaa. The outlook remains negative.
Today's rating action follows Moody's decision on 23 July 2012 to change
to negative the outlooks on the Aaa ratings of Germany, Luxembourg
and the Netherlands. At the time, Moody's also announced
that it would assess France's Aaa sovereign rating and its outlook,
which had been changed to negative on 13 February 2012, to determine
the impact of the elevated risk of a Greek exit from the euro area,
the growing likelihood of collective support for other euro area sovereigns
and stalled economic growth. Today's rating action concludes this
assessment.
Moody's decision to downgrade France's rating and maintain the negative
outlook reflects the following key interrelated factors:
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.
At the same time, Moody's explains that France remains extremely
highly rated, at Aa1, because of the country's significant
credit strengths, which include (i) a large and diversified economy
which underpins France's economic resiliency, and (ii) a strong
commitment to structural reforms and fiscal consolidation, as reflected
in recent governmental announcements, which may, over the
medium term, mitigate some of the structural rigidities and improve
France's debt dynamics.
In a related rating action, Moody's has also downgraded the ratings
of Société de Financement de l'Economie Française
(SFEF) and Société de Prise de Participation de l'État
(SPPE) to Aa1 from Aaa. Furthermore, Moody's has affirmed
the Prime-1 rating of SPPE's euro-denominated commercial
paper programme. The outlooks on the ratings of the two entities
remain negative. The senior debt instruments issued by the two
entities are backed by unconditional and irrevocable guarantees from the
French government.
RATINGS RATIONALE
The first driver underlying Moody's one-notch downgrade of
France's sovereign rating is the risk to economic growth,
and therefore to the government's finances, posed by the country's
persistent structural economic challenges. These include the rigidities
in labour and services markets, and low levels of innovation,
which continue to drive France's gradual but sustained loss of competitiveness
and the gradual erosion of its export-oriented industrial base.
The rise in France's real effective exchange rate in recent years
contributes to this erosion of competitiveness, in particular relative
to Germany, the UK and the US. The challenge of restoring
price-competitiveness through wage moderation and cost containment
is made more difficult by France's membership of the monetary union,
which removes the adjustment mechanism that the ability to devalue its
own currency would provide.
Apart from elevated taxes and social contributions, the French labour
market is characterised by a high degree of segmentation as a result of
significant employment protection legislation for permanent contracts.
While notice periods and severance payments are not significantly higher
than they are in other European countries, some parts of this legislation
make dismissals particularly difficult. This judicial uncertainty
raises the implicit cost of labour and creates disincentives to hire.
In addition, the definition of economic dismissal in France rules
out its use to improve a firm's competitiveness and profitability.
Moreover, the regulation of the services market remains more restrictive
in France than it is in many other countries, as reflected in the
OECD Indicators of Product Market Regulation. The subdued competition
in the services sector also has a negative effect on the purchasing power
of households and the input costs of enterprises. France additionally
faces significant non-price competitiveness issues that stem from
low R&D intensity compared to other EU countries.
Moody's recognises that the government recently announced measures
intended to address some of these structural challenges. However,
those measures alone are unlikely to be sufficiently far-reaching
to restore competitiveness, and Moody's notes that the track
record of successive French governments in effecting such measures over
the past two decades has been poor.
The second driver of today's rating action is the elevated uncertainty
with respect to France's fiscal outlook. Moody's acknowledges
that the government's budget forecasts target a reduction in the
headline deficit to 0.3% of GDP by 2017 and a balancing
of the structural deficit by 2016. However, the rating agency
considers the GDP growth assumptions of 0.8% in 2013 and
2.0% from 2014 onwards to be overly optimistic. On
top of rising unemployment, France's consumption levels are
being weighed down by tax increases, subdued disposable income growth
and a correction in the housing market. Net exports are unlikely
to drive economic activity in light of reduced external demand,
in particular from euro area trading partners such as Italy and Spain.
As a result, Moody's sees a continued risk of fiscal slippage
and of additional consolidation measures. Again, based on
the track record of successive governments in implementing fiscal consolidation
measures, Moody's will remain cautious when assessing whether
the consolidation effort is sufficiently deep and sustained.
The third rating driver of Moody's downgrade of France's sovereign
rating is the diminishing predictability of the country's resilience
to future euro area shocks in view of the rising risks to economic growth,
fiscal performance and cost of funding. In this context,
France is disproportionately exposed to peripheral European countries
such as Italy through its trade linkages and its banking system.
Moody's notes that French banks have sizable exposures to some weaker
euro area countries. As a result, despite their good loss-absorption
capacity, French banks remain vulnerable to a further deepening
of the crisis due to these exposures and their significant -- albeit
reduced -- reliance on wholesale market funding. This vulnerability
adds to the government's contingent liabilities arising from the
French banking system.
Moreover, France's credit exposure to the euro area debt crisis
has been growing due to the increased amount of euro area resources that
may be made available to support troubled sovereigns and banks through
the European Financial Stability Facility (EFSF), the European Stability
Mechanism (ESM) and the facilities put in place by the European Central
Bank (ECB). At the same time, in case of need, France
-- like other large and highly rated euro area member states --
may not benefit from these support mechanisms to the same extent,
given that these resources might have already been exhausted by then.
In light of the liquidity risks and banking sector risks in non-core
countries, Moody's perceives an elevated risk that at least
part of the contingent liabilities that relate to the support of non-core
euro area countries may actually crystallise for France. The risk
that greater collective support will be required for weaker euro area
sovereigns has been rising, most for notably Spain, whose
economy and government bond market are around twice the combined size
of those of Greece, Portugal and Ireland. Highly rated member
states like France are likely to bear a disproportionately large share
of this burden given their greater ability to absorb the associated costs.
More generally, further shocks to sovereign and bank credit markets
would further undermine financial and economic stability in France as
well as in other euro area countries. The impact of such shocks
would be expected to be felt disproportionately by more highly indebted
governments such as France, and further accentuate the fiscal and
structural economic pressures noted above. While the French government's
debt service costs have been largely contained to date, Moody's
would not expect this to remain the case in the event of a further shock.
A rise in debt service costs would further increase the pressure on the
finances of the French government, which, unlike other non-euro
area sovereigns that carry similarly high ratings, does not have
access to a national central bank that could assist with the financing
of its debt in the event of a market disruption.
Today's rating action on France's government bond rating was
limited to one notch given (i) the country's large and diversified
economy, which underpins France's economic resiliency,
and (ii) the government's commitment to structural reforms and fiscal
consolidation. The limited magnitude of today's rating action
also reflects an acknowledgment by Moody's of the French government's
ongoing work on a reform programme to improve the country's competitiveness
and long-term growth perspectives, with key measures expected
to be outlined in the National Pact for Growth, Competitiveness
and Employment. Moreover, on the fiscal side, the European
Treaty on the Stability, Coordination and Governance of the Economic
and Monetary Union (TSCG), known as the "fiscal compact",
will be implemented through the Organic Law on Public Finance Planning
and Governance.
RATIONALE FOR CONTINUED NEGATIVE OUTLOOK
Moody's decision to maintain a negative outlook on France's
government bond rating reflects the weak macroeconomic environment,
and the rating agency's view that the risks to the implementation
of the government's planned reforms remain substantial. Moreover,
Moody's currently also holds negative outlooks on those Aaa-rated
euro area sovereigns whose balance sheets are expected to bear the main
financial burden of support via the operations of the EFSF, the
ESM and the ECB. Apart from France, these countries comprise
Germany (Aaa negative), the Netherlands (Aaa negative) and Austria
(Aaa negative).
WHAT COULD MOVE THE RATING UP/DOWN
Moody's would downgrade France's government debt rating further
in the event of additional material deterioration in the country's economic
prospects or difficulties in implementing reform. Substantial economic
and financial shocks stemming from the euro area debt crisis would also
exert further downward pressure on France's rating.
Given the current negative outlook on France's sovereign rating,
an upgrade is unlikely over the medium term. However, Moody's
would consider changing the outlook on France's sovereign rating
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. Upward pressure
on France's rating could also result from a significant improvement in
the government's public finances, accompanied by a reversal in the
upward trajectory in public debt.
COUNTRY CEILINGS
France's foreign- and local-currency bond and deposit
ceilings remain unchanged at Aaa. The short-term foreign-currency
bond and deposit ceilings remain Prime-1.
METHODOLOGY
The principal methodology used in determining France's ratings was
Sovereign Bond Ratings Methodology, published in September 2008.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The ratings of rated entity France, Government of were initiated
by Moody's and were not requested by the rated entity.
The rated entity France, Government of or its agents participated
in the rating process. This rated entity or its agent(s)provided
Moody's access to the books, records and other relevant internal
documents of the rated entity.
The ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, parties not involved in the ratings,
and public information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entities or their related third parties within
the two years preceding the credit rating action. Please see the
special report "Ancillary or other permissible services provided
to entities rated by MIS's EU credit rating agencies" on the
ratings disclosure page on our website www.moodys.com for
further information.
The below contact information is provided for information purposes only.
Please see the issuer page on www.moodys.com for Moody's
regulatory disclosure of the name of the lead analyst and the office that
has issued the credit rating.
The person who approved France, Government of credit ratings is
Bart Oosterveld, MD, Financial Institutions, JOURNALISTS:
212-553-0376, SUBSCRIBERS: 212-553-1653.
The person who approved Charbonnages De France credit ratings is Eric
de Bodard, MD, Corporate Finance, JOURNALISTS:
44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454.
The relevant Releasing Office for each rating is identified under the
Debt/Tranche List section on the Ratings tab of each issuer/entity page
on moodys.com.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Dietmar Hornung
VP - Senior Credit Officer
Sovereign Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Bart Oosterveld
MD - Sovereign Risk
Sovereign Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades France's government bond rating to Aa1 from Aaa, maintains negative outlook
