OVERVIEW
- We believe the French government's reforms to taxation, as well as to product, services, and labor 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.
- Furthermore, we believe lower economic growth is constraining the government's ability to consolidate public finances.
- We are therefore lowering our long-term foreign and local currency sovereign credit ratings on France to 'AA'.
- The outlook is stable, reflecting our view that the probability that we will raise or lower the rating on France over the next two years is less than one-in-three.
RATING ACTION On Nov. 8, 2013, Standard & Poor's Ratings Services lowered its unsolicited long-term foreign and local currency sovereign credit ratings on the Republic of France to 'AA' from 'AA+'. At the same time, we affirmed our 'A-1+' short-term ratings. The outlook is stable. RATIONALE The downgrade reflects our view that the French government's current approach to budgetary and structural reforms to taxation, as well as to product, services, and labor markets, is unlikely to substantially raise France's medium-term growth prospects. Moreover, we see France's fiscal flexibility as constrained by successive governments' moves to increase already-high tax levels, and what we see as the government's inability to significantly reduce total government spending. The stable outlook reflects our expectation that the government is committed to containing net general government debt, which we anticipate will peak at 86% of GDP in 2015. The stable outlook also indicates that we currently believe that the probability of a further rating action on France over the next two years is less than one-in-three. In our opinion, the economic policies the government has implemented since we affirmed the ratings on France on Nov. 23, 2012 have not significantly reduced the risk that unemployment will remain above 10% until 2016, compared with an average of 8%-9% prior to 2012. In our view, the current unemployment levels are weakening support for further fiscal and microeconomic reforms, and are depressing longer term growth prospects. France's real economic output rebounded to the levels reached in the fourth quarter of 2007 only in 2013. We are projecting close-to-zero real GDP growth this year, followed by a cyclical recovery to an average of just over 1% for 2014-2015. The steps the government has taken so far--such as introducing corporate tax credits on firms' payrolls, and reaching agreement on labor market reforms and microeconomic reforms to specific sectors—are positive, in our view, but probably insufficient to significantly unlock France's economic growth potential. In particular, we think private-sector growth is unlikely to improve substantially without further structural reforms. While the government has taken steps toward microeconomic reforms, the overall effect appears to us to leave France with less economic flexibility than other highly-rated eurozone members. As a consequence, French exporters appear to continue to be losing market share to those European competitors whose governments have more effectively loosened the structural rigidities in their economies. Since it took office in May 2012, the current French government has started to strengthen its fiscal framework by implementing a multiannual public finance planning act and establishing a high council for public finances. However, it has also relaxed its headline budgetary targets due to the deteriorating economic background. Successive governments' stated commitment to budgetary consolidation has relied on increasing an already-high tax burden. We estimate France's general government revenue will remain at over 53% of GDP through to 2015 (compared to below 50% prior to 2011), the highest ratio of an OECD member outside the Nordic region. We project general government spending will stay above 56% of GDP over the same period, the highest in the eurozone and only surpassed by Denmark within the OECD. We understand that the government aims to reduce government spending, in line with the 2012-2017 public finance programming law. However, we believe that the effect of the government's measures to this end--both announced and already taken--will be relatively modest. At the same time, political room for additional revenue measures has lessened, in our opinion. Rising popular disapproval of incremental taxation has led to recent policy reversals. Combined with our view that the government has limited room to meaningfully lower spending over the 2013-2016 forecast horizon, we believe that France's revenue and expenditure flexibility has diminished. We had previously considered France's fiscal flexibility to be high compared to its peers. We now forecast a general government deficit of 4.1% of GDP in 2013, in line with the government's current target but above our previous expectation of 3.5% of GDP when we affirmed our ratings on France in November 2012. At that time, the government's 2013 target was 3% of GDP. (See "Ratings On France Affirmed At 'AA+/A-1+' On Commitment To Budgetary And Structural Reforms; Outlook Negative," published on Nov. 23, 2012 on RatingsDirect). We estimate net government debt will peak at over 86% of GDP in 2015. We also forecast gross debt at above 93% of GDP by end-2015, excluding the guarantees related to the European Financial Stability Facility (EFSF). (See "S&P Clarifies Its Approach To Accounting For EFSF Liabilities When Rating The Sovereign Guarantors," published Nov. 2, 2011.) The 'AA' ratings on France reflect our view of the French economy's underlying strengths, including its high absolute levels of wealth and productivity, its high diversification and resilience, supportive demographic dynamics, and financial sector stability. It also has what we consider to be high private-sector savings rates and incomes, reflecting a skilled and well-educated workforce, political stability, and the euro's reserve currency status. France also benefits from significant monetary flexibility as a core member of the eurozone. This has been evident in favorable external financing conditions for the sovereign and what we view as an effective transmission of appropriately low real interest rates on loans to the nonfinancial sector. At the same time, we consider that the currently historically low long-term government bond yields have temporarily reduced pressure on France's general government deficit. The rating is constrained by the French government's elevated spending and tax levels, its high and still rising general government debt burden, and constraints on economic competitiveness. All these factors weaken France's growth prospects, in our opinion. OUTLOOK The stable outlook indicates our view that risks to France's creditworthiness are balanced and that there is less than a one-in-three probability that we will raise or lower the ratings over the next two years. We could lower the ratings if, contrary to our current expectations, France's general government deficit widened significantly compared to our current forecast; if we were to conclude that the government's commitment to contain public debt is weakening; or if contingent fiscal risks materialized, leading to net general government debt of more than 100% of GDP. We could also lower our ratings on France if we see a significant and unexpected increase in risks to financial stability from a further fracturing of financing conditions either within the eurozone or outside it. We could raise the ratings if net general government debt fell below 80% of GDP or there were evidence of improved economic competitiveness and resultant growth substantially in excess of our current forecast. KEY STATISTICS
Table 1
| France (Republic of) -- Selected Indicators | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mil. € | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013e | 2014f | 2015f | 2016f | |||||||||||||
| Nominal GDP (US$ bil) | 2,258 | 2,586 | 2,843 | 2,630 | 2,568 | 2,786 | 2,611 | 2,701 | 2,759 | 2,841 | 2,932 | |||||||||||||
| GDP per capita (US$) | 35,707 | 40,629 | 44,422 | 40,874 | 39,709 | 42,864 | 39,969 | 41,143 | 41,806 | 42,834 | 43,974 | |||||||||||||
| Real GDP growth (%) | 2.5 | 2.3 | (0.1) | (3.2) | 1.7 | 2.0 | 0.0 | 0.0 | 0.7 | 1.4 | 1.5 | |||||||||||||
| Real GDP per capita growth (%) | 1.7 | 1.6 | (0.7) | (3.7) | 1.2 | 1.5 | (0.5) | (0.5) | 0.2 | 0.9 | 0.9 | |||||||||||||
| Change in general government debt/GDP (%) | 0.3 | 3.3 | 5.5 | 9.3 | 5.3 | 5.9 | 4.1 | 4.1 | 3.6 | 3.0 | 2.3 | |||||||||||||
| General government balance/GDP (%) | (2.4) | (2.8) | (3.3) | (7.6) | (7.1) | (5.3) | (4.8) | (4.1) | (3.6) | (3.0) | (2.3) | |||||||||||||
| General government debt/GDP (%) | 64.0 | 64.2 | 68.2 | 79.2 | 82.4 | 85.6 | 88.4 | 91.2 | 92.9 | 93.2 | 92.7 | |||||||||||||
| Net general government debt/GDP (%) | 60.7 | 59.0 | 62.6 | 72.8 | 76.6 | 78.8 | 80.8 | 83.7 | 85.6 | 86.1 | 85.7 | |||||||||||||
| General government interest expenditure/revenues (%) | 5.1 | 5.4 | 5.9 | 4.9 | 4.9 | 5.2 | 4.9 | 4.4 | 4.6 | 4.7 | 4.7 | |||||||||||||
| Oth dc claims on resident non-govt. sector/GDP (%) | 98.4 | 105.5 | 108.7 | 111.5 | 114.2 | 115.9 | 116.0 | 115.4 | 116.4 | 116.4 | 116.2 | |||||||||||||
| CPI growth (%) | 1.9 | 1.6 | 3.2 | 0.1 | 1.7 | 2.3 | 2.2 | 1.0 | 1.5 | 1.4 | 1.4 | |||||||||||||
| Gross external financing needs/CARs +use. res (%) | 302.3 | 325.0 | 377.8 | 417.8 | 397.5 | 374.1 | 404.9 | 389.2 | 377.6 | 369.1 | 361.8 | |||||||||||||
| Current account balance/GDP (%) | (0.6) | (1.0) | (1.7) | (1.3) | (1.3) | (1.8) | (2.2) | (1.9) | (1.9) | (1.8) | (1.8) | |||||||||||||
| Current account balance/CARs (%) | (1.6) | (2.8) | (4.7) | (3.9) | (3.6) | (4.6) | (5.8) | (5.0) | (4.8) | (4.6) | (4.5) | |||||||||||||
| Narrow net external debt/CARs (%) | 148.2 | 176.9 | 171.1 | 227.3 | 225.7 | 205.9 | 251.8 | 233.1 | 225.1 | 219.4 | 214.0 | |||||||||||||
| Net external liabilities/CARs (%) | (44.7) | (25.9) | 37.5 | 22.3 | 24.0 | 45.4 | 47.4 | 42.6 | 45.6 | 48.5 | 51.2 | |||||||||||||
| Net general government debt/GDP excludes the guarantees related to the European Financial Stability Facility. Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. e--Estimate. f--forecast. CARs--Current account receipts. | ||||||||||||||||||||||||
| The data and ratios above result from S&P’s own calculations, drawing on national as well as international sources, reflecting S&P’s independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. | ||||||||||||||||||||||||
RELATED CRITERIA AND RESEARCH
- Sovereign Government Rating Methodology And Assumptions, June 24, 2013
- Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013
- Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
- Rating Sovereign-Guaranteed Debt, April 6, 2009
- The French Economy Exits Recession But Remains Fragile, Oct. 22, 2013
- The Eurozone Crisis Isn't Over Yet, Oct. 1, 2013
- Banking Industry Country Risk Assessment: France, July 29, 2013
- Is Austerity Being Relaxed In The Eurozone – And Does It Matter For Ratings?, June 4, 2013
- Sovereign Defaults And Rating Transition Data, 2012 Update, March 29, 2013
- Ratings On France Affirmed At 'AA+/A-1+' On Commitment To Budgetary And Structural Reforms; Outlook Negative, Nov. 23, 2012
- S&P Clarifies Its Approach To Accounting For EFSF Liabilities When Rating The Sovereign Guarantors, Nov. 2, 2011
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related Criteria And
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to
make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook.
RATINGS LIST
Downgraded; CreditWatch/Outlook Action; Ratings Affirmed
To From
France (Republic of) (Unsolicited Ratings)
Sovereign Credit Rating AA/Stable/A-1+ AA+/Negative/A-1+
Senior Unsecured AA AA+
Societe de Financement de L'Economie Francaise
Senior Unsecured* AA AA+
Ratings Affirmed
France (Republic of) (Unsolicited Ratings)
Transfer & Convertibility Assessment AAA
Certificate Of Deposit A-1+
Societe de Prise de Participation de l Etat
Issuer Credit Rating --/--/A-1+
Societe de Prise de Participation de l Etat
Commercial Paper* A-1+
*Guaranteed by the Republic of France.
