Downgrade risks have increased for France this week
France has been rated Aa1 with a negative outlook by Moody’s since November 2012. France appears increasingly isolated with its negative outlook given that Moody’s has upgraded several sovereigns this year, revised various outlooks back to stable (Figure 1) and notably, did not revise the outlook back to stable when France last appeared in its calendar on 23rd May. France next appears on Moody’s calendar this Friday (19th Sept). In their latest Credit Opinion (5th August), Moody’s indicated that they would likely downgrade France’s rating if:
- Moody’s confidence in the likelihood of the implementation of the proposed reforms or their effectiveness were to decline,
- Moody’s views on the country's medium- to long-term growth prospects were to deteriorate further,
- Moody’s expectation with respect to the medium-term path of the general government's debt/GDP ratio were to drift towards 100%.
Why we think downgrade risks have increased: Over the course of the last year, economic performance has been disappointing, with zero QoQ GDP growth both in Q1 and Q2. In light of this, Moody’s stated on 18th August that they have “cut 2014 real GDP forecast to 0.5% from 0.6% and our 2015 growth forecast to 0.9% from 1.3%” signalling a further deterioration in their growth outlook. Furthermore, finance minister Sapin recently lowered growth forecasts (2014 to 0.5% from 1%) and raised deficit forecasts (now expecting 4.4% in 2014 and 4.3% in 2015, Figure 2).
Moody’s stated the fact that France will miss its 2014 deficit target was credit negative on 18th August.
Outlook therefore unlikely to be revised back to stable: We believe it is now less likely that Moody’s revises its outlook to stable on Friday. Instead, we believe it is more likely that Moody’s puts France formally on a “review for possible downgrade” with a conclusion probably coming after the budget (due on 1st October).
Of course, all of the above assumes that rating agencies are still relevant in a world where central-planning has made all non-central banker opinion irrelevant; furthermore with the ECB now openly buying up ABS, will even a one notch downgrade in France matter.