Standard & Poor’s, which stripped France of its AAA credit rating in January of last year, recently delivered another cut to the country—this time from AA+ to AA causing some concern from international investors. The ratings agency said that measures taken by President Francois Hollande were not adequate to spur growth in the Eurozone’s second largest economy.
The rate on French bonds barely budged after the announcement—up only seven-hundredths of a point to 2.23%—and there was no mad rush to the exits. And Hollande has said that he will not change strategy, but will keep to the course currently held by the French government. Although it is obligated to follow EU rules to keep its spending in check, policy is focused more on tax increases than benefit cuts to cut the government’s deficit.
Other European countries that have aggressively followed a course of austerity have seen unemployment skyrocket, leaving many people without a social safety net in places like Spain, Portugal and Greece. France chose to go a different route, and its economy, while not exactly humming, is still expanding. In the second quarter of 2013, it was up 0.5% from Q1, and its annualized rate is coming in around 2%. Its unemployment rate is currently at 11.1%.
But S&P said it has no confidence in Hollande’s strategy. “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. Ongoing high unemployment is weakening support for further significant fiscal and structural policy measures,” it said in a statement.
Still, neither Fitch nor Moody’s has rushed to join S&P in its action, yet. In particular, Fitch, which was the last of the Big Three to strip the country of its AAA sovereign rating, did so only this past July—with a stable outlook. It has seen no need to join S&P in adding a fresh downgrade to the country’s sovereign debt rating. Fitch spokesman Peter Fitzpatrick said in an e-mail that the July report was “very clear on our outlook for France and the rating drivers; i.e., why it has a stable outlook.”
At the time, Fitch predicted that France’s “GDP [will] contract in 2013 before growing by 0.7% in 2014. Fitch’ projection for long-term potential growth is broadly unchanged at around 1.5%.” Thus far, France’s economy is still expanding.