(The following statement was released by the rating agency)
Link to Fitch Ratings' Report: France - Rating Action Report
LONDON, July 12 (Fitch) Fitch Ratings has downgraded France's Long-term foreign
and local currency Issuer Default Ratings (IDR) to 'AA+' from 'AAA'. The Outlook
is Stable. At the same time, the agency has affirmed France's Short-term foreign
currency IDR at 'F1+' and the Country Ceiling at 'AAA'.
KEY RATING DRIVERS
The downgrade of France's foreign and local currency IDRs reflects the following
key rating drivers and their relative weights:
- Fitch now forecasts general government gross debt (GGGD) to peak higher at 96%
of GDP in 2014 and decline only gradually over the long term, remaining at 92%
in 2017. This compares with Fitch's previous projections in December 2012 of
GGGD peaking at 94% (and 92% when it first revised the Outlook to Negative in
December 2011), and declining more rapidly to below 90% by 2017.
- The agency commented at the time of its previous rating review that this was
the limit of the level of indebtedness consistent with France retaining its
'AAA' status assuming debt was firmly placed on a downward path from 2014. Its
projections for France's GGGD ratio are significantly higher than the 'AAA'
median of 49% and 'AA' median of 27%. The only 'AAA' country with a higher debt
ratio is the US (AAA/Negative), which has exceptional financing flexibility and
debt tolerance afforded by the preeminent global reserve currency status of the
- Risks to the agency's fiscal projections lie mainly to the downside, owing to
the uncertain growth outlook and the ongoing eurozone crisis, even assuming no
wavering in commitment to fiscal consolidation. A debt ratio that is higher for
longer reduces the fiscal space to absorb further adverse shocks.
- Economic output and forecasts are substantially weaker than when Fitch revised
the Outlook to Negative. The unemployment rate has also jumped to a 15 year high
of 10.9% in May 2013. The weaker economic outlook is the primary factor behind
increases in the budget deficit and France remaining in the EU's Excessive
Deficit Procedure for a year longer. Fitch expects the French economy to recover
less quickly then official projections, owing to headwinds from subdued external
demand, weaker competitiveness, high unemployment and fiscal consolidation. Its
latest forecasts are for GDP to contract in 2013 before growing by 0.7% in 2014.
- As well documented by organisations such as the OECD, IMF and European
Commission, the French economy faces a number of structural challenges,
including gradually declining competitiveness, weak profitability and rigidities
in the labour, goods and services markets, which weigh on the medium term
outlook. Fitch's projection for long term potential growth is broadly unchanged
at around 1.5%.
- France's current account was in a deficit of 2.3% of GDP in 2012. Although
that is not especially high, it has deteriorated steadily from surpluses a
decade ago, reflecting a steady loss of competitiveness and export market share.
This evolution has been mirrored by the rise in net external debt which has
risen to 25% of GDP, compared with the 'AAA' median of 20%.
Despite the loss of its 'AAA' status, France's extremely strong credit profile
is reflected in its 'AA+' rating with a Stable Outlook, which reflects the
following main factors.
- France's wealthy and diversified economy and political stability entrenched by
strong and effective civil and social institutions.
- Fitch judges financing risk to be very low reflecting an average debt maturity
of seven years, low borrowing costs and strong financing flexibility underpinned
by its status as a large benchmark eurozone sovereign issuer.
- France has a track record of relative macro-financial stability including low
and stable inflation. It also benefits from moderate levels of household
indebtedness and a high household saving rate.
- Since coming into office last year the Socialist government has set out and
started to implement a wide-ranging programme of structural reforms, including
the 'National Compact for Growth, Competitiveness and Jobs' and recent labour
market reforms. This may help improve the long term growth and current account
position. However, the quantitative impact of the new measures is uncertain and
reforms are subject to implementation risk.
- The recent structural reform of the budget procedure through the organic law
that transposes the EU Fiscal Compact into national law will strengthen the
confidence in the outlook for French fiscal policy. As part of the reforms an
independent body, the High Council of Public Finances was created with the role
to give an opinion on the growth forecasts underpinning budget forecasts. It
will also monitor the government's compliance with the multi-annual planning law
and will be charged with identifying and making public any major budget
- Risks in the French banking system have eased as asset quality, funding and
capitalisation have improved, though exposures to Italy remain significant.
- The intensity of the eurozone crisis has eased over the past 12 months
reflecting progress with country fiscal and reform plans and policy enhancements
at the EU level, including the ECB's OMT and gradual steps towards banking
union. Nevertheless, in Fitch's view the eurozone crisis is not over and
contingent liabilities arising from the crisis remain material. France has
already incurred commitments totalling EUR48.1bn (2.4% of GDP) as the second
largest guarantor of the EFSF. France's paid-in capital contribution to the
European Stability Mechanism (ESM) is EUR16.2bn with a further EUR126.4bn in
The Stable Outlook indicates that a change in France's sovereign ratings is not
currently expected within the next two years, reflecting the higher tolerance of
downside risks at the 'AA+' level.
The main factors that could lead to a negative rating action, individually or
- Public finances weakening materially compared to Fitch baseline projections.
- Deterioration in competitiveness and growth prospects.
- A re-intensification of the eurozone crisis or crystallisation of material
amounts of contingent liabilities on French balance sheets.
The main factors that could lead to a positive rating action, individually or
- The government budget deficit and debt ratio declining at a significantly
faster pace than currently projected to safer levels
- A significantly stronger economic recovery of the French economy than
currently forecast and increased confidence in medium-term growth prospects, for
example owing to sustained implementation of deep and comprehensive structural
There is uncertainty over the near- and medium-term evolution of output,
unemployment and the government deficit. For the purposes of its fiscal
projections Fitch forecasts the French economy to contract by 0.3% in 2013 and
grow by 0.7% in 2014 and 1.2% in 2015 and converge to its long run trend of
around 1.5% by 2016. This compares with the government's forecast of growth of
0.1% in 2013, 1.2% in 2014 and 2.0% in 2015 and 2016. The difference in the
economic forecasts and the headline fiscal balance largely explain the agency's
higher public debt to GDP projections compared to official estimates.
Fitch expects the headline fiscal deficit to remain above 3% of GDP into 2014
but ease to around 1% of GDP in 2017, the end of the current presidency. The
government projects the shortfall to reach 2.9% and ease to 0.7%, respectively.
Fitch assumes there are no further contributions by France to the eurozone
crisis mechanisms - the EFSF and ESM - than already announced. The cumulative
impact of the eurozone financial assistance programmes will climb to EUR69bn in
2014 (3.4% of GDP) mostly on further EFSF disbursement to Greece and capital
contribution to the ESM.
Fitch assumes that the French sovereign will continue to access market funding
at low interest rates. Under Fitch's Sovereign Rating Criteria and model,
eurozone sovereigns are assessed to have a somewhat lower debt tolerance for a
given rating than non-EMU peers with their own reserve currencies and national
central banks willing and able to intervene in sovereign debt markets.
Fitch also does not expect further government debt raising interventions to
support the banking industry. Data from Eurostat shows that by the end of 2012
EUR2.2bn of government liabilities was related to supporting the banking system.
Contingent liabilities relating to guarantees to the banking sector were
EUR50.6bn (2.5% of GDP).
Fitch assumes there will be progress in deepening fiscal and financial
integration at the eurozone level in line with commitments by policy makers. It
also assumes that the risk of fragmentation of the eurozone remains low.
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