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Rating Action:

Moody's downgrades France's government bond ratings to Aa2 from Aa1; outlook changed to stable from negative

Global Credit Research - 18 Sep 2015

London, 18 September 2015 -- Moody's Investors Service has today downgraded France's government bond ratings by one notch to Aa2 from Aa1. The outlook on the ratings is stable.

The key interrelated drivers of today's action are:

1. The continuing weakness in France's medium-term growth outlook, which Moody's expects will extend through the remainder of this decade; and

2. The challenges that low growth, coupled with institutional and political constraints, poses for the material reduction in the government's high debt burden over the remainder of this decade.

At the same time, France's credit worthiness remains extremely high, supporting an Aa2 rating. The country's significant strengths include: (i) a large, wealthy, and well-diversified economy with a high per capita income, (ii) favourable demographic trends as compared to other advanced economies, and (iii) a strong investor base and low financing costs. The rating and its stable outlook are also supported by the country's efforts to stabilise its public sector finances and initiatives recently deployed or announced to arrest the erosion of the economy's competitiveness.

In a related rating action, Moody's has today announced its decision to downgrade the ratings of the Société de Prise de Participation de l'État (SPPE) to Aa2 from Aa1. The SPPE's short-term rating was affirmed at P-1, including its euro-denominated commercial paper programme. The outlook on the ratings is stable. The debt instruments issued by the SPPE are backed by unconditional and irrevocable guarantees from the French government.

The local and foreign currency deposit ceilings and the local-currency and foreign-currency bond ceilings for France are unaffected by this rating action and remain at Aaa/P-1.

RATINGS RATIONALE

The main driver of Moody's decision to downgrade France's government bond rating to Aa2 is the increasing clarity, in Moody's view, that French economic growth will remain low over the medium term, and the obstacle that this will pose for any material reversal in France's elevated debt burden in the foreseeable future.

The current economic recovery in France has already proven to be significantly slower -- and Moody's believes that it will remain so -- compared with the recoveries observed over the past few decades. In part, this is due to the erosion of competitiveness and loss of growth potential following the global financial crisis. It is becoming increasingly clear, in the rating agency's view, that these problems will continue to constrain growth long after the cyclical recovery from the crisis is completed. In Moody's opinion, France's potential annual growth rate is at most 1.5% over the medium term. France faces material economic challenges, such as a high rate of structural unemployment, relatively weak corporate profit margins, and a loss of global export market share that have their roots in long-standing rigidities in its labour and product markets.

France entered the crisis with a legacy of sustained, very high levels of state expenditure and a history of recurring budget deficits that goes back four decades. A pattern that has become evident over time has been that French public sector debt, relative to GDP, essentially stabilises in good times and rises in bad. The rise in indebtedness since the onset of the crisis has been very rapid and the country's debt burden will likely peak and stabilise at around or close to 100% of GDP. Notwithstanding the magnitude of the fiscal and economic challenges that the government faces, the institutional response since the onset of the crisis has been slow and halting, essentially consisting of a series of small positive steps that have, individually and collectively, been insufficient to deal with these challenges in a timely manner. Within the context of Moody's sovereign rating methodology, a government's institutional willingness and ability to reverse the impact of shocks on the public finances is an important attribute associated with very high rating levels. While Moody's assessment of the quality of France's institutions remains very high, the rating agency does not believe that the country's institutional strength is on a par with many of the most highly rated sovereigns.

Taken together, low growth and institutional and political challenges to reforms make it unlikely that we will see a material reduction in the government's high debt burden over the rest of this decade, which means that it will remain well above the debt burdens of Aa1-rated peers. The combination of structurally weaker growth, low inflation, and a more than 30 percentage point increase in the debt/GDP ratio since the onset of the global financial crisis means that the shock absorption capacity of France's balance sheet has weakened and, in Moody's view, is no longer expected to recover materially in the next three to five years.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on France's Aa2 sovereign rating partly reflects the strengths that underpin the Aa2 rating itself—the underlying economic and fiscal strengths of the French sovereign. France is a large, wealthy and well-diversified economy that is home to a significant number of companies in high-value added sectors. Income inequality is relatively low. Relative to other advanced economies, France has a favourable demographic profile, and is not expected to see a contraction in the size of its working age population over the long term. The government's current interest burden (both as a percentage of revenues and as a percentage of GDP) does not represent a significant constraint on the public finances. Efforts are being taken to reduce the budget deficit, albeit at a materially slower pace than was envisioned as recently as the 2014 Stability Programme.

The stable outlook also recognises the French government's stated desire to address some of the structural challenges to growth and the fiscal balance, which should at least protect its balance sheet from further deterioration. While the revealed preference of French institutions is to undertake incremental, gradual change, the changes we expect in these areas—for example, though a second Macron Law and a revision to the labour code--between now and national elections in 2017 should prevent a further material deterioration in French credit quality over this time horizon.

WHAT COULD MOVE THE RATING UP/DOWN

As reflected by the stable rating outlook, Moody's does not anticipate any movement in the rating over the next 12-18 months. However, downward pressure on the rating could arise if progress on structural macroeconomic reform were to fail to materialise as we expect. Moody's could also downgrade France's government debt rating further in the event of a reduced political commitment to fiscal consolidation or should we conclude that a material increase in debt was likely for any other reason.

Conversely, Moody's would consider changing the outlook on France's rating to positive, and ultimately upgrading the rating back to Aa1 in the event of much more rapid economic growth and debt-to-GDP reduction than Moody's is currently anticipating.

GDP per capita (PPP basis, US$): 40,375 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.2% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.1% (2014 Actual)

Gen. Gov. Financial Balance/GDP: -4% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -0.9% (2014 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: Very High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 15 September 2015, a rating committee was called to discuss the rating of the France, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's institutional strength/framework, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings of rated entity Government of France were not initiated or not maintained at the request of the rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis Government of France or their agents are considered to be participating entities. These rated entities or their agents generally provide Moody's with information for their ratings process.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sarah Carlson
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD-Banking & Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades France's government bond ratings to Aa2 from Aa1; outlook changed to stable from negative
No Related Data.
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