Gloomy News for Euro Funds as France Suffers New Downgrade

Photo: “saikofish”

Following a downgrade by credit rating agency Standard & Poor’s earlier this year, on November 19 Moody’s Investors Service stripped France of its AAA bond rating in a blow to the western European nation and its neighbors.  The move comes as Moody’s underscores its “negative outlook” on the economies of Germany, the Netherlands, and Austria as they are expected to bear “the main financial burden of support” to the Eurozone’s weaker economies.

Though Bloomberg Businessweek described market response to the downgrade as “relatively muted,” Bank of America Strategist John Wraith told the publication: “[The Eurozone] is going from bad to worse.” Indeed, the European Financial Stability Facility (EFSF), the body charged with raising money to fund Eurozone member countries, is facing a downgrade itself as a result.  The fund still currently enjoys a AAA rating—the highest possible—despite the downgrade of France, it’s second top guarantor of bailout monies (behind Germany). A downgrade of the EFSF could result in a higher interest rate for troubled Euro nations’ badly needed funds.

Credit ratings, like those assigned by agencies such as Standard & Poor’s and Moody’s, are used to indicate the risk that a lender will not be repaid.  The higher the rating, the more likely the nation (in this case) is to repay the monies they borrow.  A downgrade therefore indicates the increasingly unlikelihood that a borrower will repay their debts—a sign of a slowing and weakening economy.

France’s downgrade by Moody’s is an unwelcome development for the fledgling government of President François Hollande, who despite having proposed €20 billion in tax credits to ease labor costs (following suggestions by the recent Gallois Report), will face difficulty in upcoming European budget talks. France is expected to advocate sustaining full farm subsidies at the upcoming summit, while neighboring Germany will push to contain spending. “This downgrade will certainly increase pressure on France,” said Jan Techau of the Carnegie Endowment to Bloomberg Businessweek.  “It gives Germany more of an edge over France.”

“It would be good if the Socialists [in France] would courageously initiate real structural reforms now,” said German Politician Volker Kauder to publication Der Spiegel.  Germany is growing increasingly anxious over the weakening French economy, which recently posted a 13-year high of 10.2 percent unemployment.  Additionally, France’s trade deficit is expected to match last year’s record.

“Germany is helplessly watching the deterioration of the French economy […] without Berlin being able to do much about it,” observed Frederik Erixon at the European Centre for International Political Economy in Brussels.

The Wall Street Journal reports that Moody’s French downgrade came in response to “a drag on the country’s long-term growth prospects from lost competitiveness and rigidities in labor, goods and services markets.”  Moody’s had been waiting to examine President Hollande’s proposed 2013 budget before reevaluating the nation’s credit rating.

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