By Daniel Bases
Nov 19, NEW YORK (Reuters) - Moody’s Investors Service downgraded France’s sovereign rating by one notch to Aa1 from Aaa, the agency said on Monday, citing the country’s uncertain fiscal outlook as a result of “deteriorating economic prospects.”
Moody’s said it is maintaining a negative outlook on the country due to structural challenges and a “sustained loss of competitiveness” in the country.
Standard & Poor’s has a AA-plus rating and negative outlook on France, which it downgraded by one notch in January from AAA. Fitch Ratings has France at AAA, also with a negative outlook.
The loss of Aaa rating from two agencies poses a problem for France, as investment funds often require their best assets to have a minimum of two top notch ratings in order to remain in their portfolios.
Secondly, borrowing costs could rise for France given it is now not considered as strong a credit risk as before, although the rating is still very high.
“I‘m not surprised for two reasons. Rating agencies are trying to beat each other at downgrading everybody but secondly simply because France is paying the price for not engaging in reform,” said Axel Merk, president of Merk Investments in Palo Alto, California
“The question is whether it is a wake-up call, or not, and I don’t think so; the French are too proud. Some metrics in France have been deteriorating a tad but not enough for stubborn politicians to change course,” Merk said.
The euro slid against the U.S. dollar, dropping from a near two-week high after the downgrade to trade off 0.27 percent to $1.2777.
“There is probably more downside until the kneejerk reaction is out of the way. But on the whole it seems likely that this more reflects an already existing reality than new information for the market,” said Steven Englander, global head of G10 FX strategy at Citi.