1 Feb 2012
At the start of the year, France received bad news from one ratings agency and somewhat reassuring news from another. Standard & Poor’s decided to downgrade the country from AAA+ to AA+, due to worries about its ability to repay its debt. While S&P went ahead with the downgrade, another ratings agency, Moody’s, has disagreed, instead preferring to consider France as a stable economic prospect, at least for the time being. There is some dissension on whether ratings downgrades really affect the market or not, but investors who seem comfortable with a country’s current economic standing may suddenly change their minds after hearing of a downgrade, sending its stock market plunging.
Why Standard & Poor’s downgraded France
Standard & Poor’s downgraded France’s credit rating, because analysts viewed the country as a credit risk. As yet, French president, Nikolas Sarkozy, has been unwilling to take decisive action, such as raising taxes and reducing spending on debt and is unlikely to do so in the near future, due to impending elections this spring. Standard & Poor’s has viewed the government’s inaction as a sign that nothing substantial will change in France’s economy to ensure a rapid recovery.
Reasons for Moody’s Rating consistency
According to a statement, Moody’s decided to maintain its AAA+ rating for France based on analysts’ belief that the country’s overall economy remains strong. Rather than following Standard & Poor’s downgrade, Moody’s maintained a stable economic outlook for the country. The vote of confidence no doubt helped France secure a much needed €8.6m loan the same day. Interestingly, the lenders who purchased the debt raised the imposed interest rate on the funds by nearly 50 percent, charging France 0.165 interest on the 12-week loan.
Despite this temporary boost, Moody’s is not ruling out a ratings downgrade in the future. The agency said that it would review France’s economic status during the first three months of 2012, when it would reassess its prospects. The French government has attempted to downplay the move and Francois Baroin, the finance minister, reaffirmed his faith in the national economy. Baroin described his country’s economy as, “an investment without any risk” and added that its bonds were, “among the most secure in the world”.
How ratings agencies decide on a country’s status
Generally, countries with strong economic output and low debt receive a high credit rating, just as a person with high income and low debt receives a high individual credit score. When a country appears to become economically stagnant or have a reduced gross domestic product, accompanied by a mountain of debt, lenders may begin to view the nation as an unsafe investment.
Along with France, eight other countries in the eurozone were also downgraded, including Spain and Italy. This widespread downgrade sparked fears that the bulk of the eurozone was becoming economically unstable. For a country like France, with a massive amount of debt, having a high credit rating is essential to finding investors who will continue to purchase debt at a level necessary to keep it financially stable.