* S&P says French reform efforts insufficient to raise
* Market reaction to downgrade muted
* Government committed to all possible budget
* But president says he won't sacrifice welfare model
* Industrial output fall highlights economic weakness
By Nicholas Vinocur
PARIS, Nov 8 Standard & Poor's cut France's
sovereign credit rating on Friday by one notch to AA from AA+,
giving a thumbs-down to President Francois Hollande's efforts to
put the euro zone's second largest economy back on track.
All three major rating agencies had already stripped France
of its top-grade triple-A status. But S&P was the first to
downgrade it for a second time, warning that the economic
reforms of the past year were not sufficient to lift growth.
The downgrade reflected fears that the government may
struggle to push through further unpopular changes due to
violent protests against its budget policy and record low
opinion poll ratings for Hollande.
But, as with previous French downgrades, market reaction was
muted. By late European trading, the yield spread of French over
German debt narrowed back to around the same gap as before S&P's
announcement, with French bonds yielding 46 basis points more
than the German benchmark.
Hollande said his Socialist-led government was committed to
making all possible budget savings measures but not at the price
of sacrificing France's generous welfare model.
"This policy ... is the only one that can guarantee our
credibility and we can judge that from the low interest rates on
the markets," he said at a World Bank conference in Paris.
Data released on Friday showed a surprise drop in industrial
production in September and a wider trade deficit, underscoring
weakness in an economy where unemployment is stuck at around 11
S&P adjusted its outlook for French debt to stable from
negative, citing Hollande's commitment to containing net debt,
which it expects to peak at 86 percent of output in 2015.
France's CAC 40 stock index was underperforming peers in
afternoon trade. The index traded 0.67 percent lower at 4252.00
by 1527 GMT.
Hollande's government has enacted a modest reform to add
flexibility to the labour market and a review of its generous
pension system, aimed at narrowing funding shortfalls.
But the latter in particular was less than expected by the
European Commission, which urged Paris this year to make
structural reforms in return for giving it an extra two years to
bring its public deficit within EU targets.
"If France does not change tack, it condemns itself to
further long-term decline," Holger Schmieding, an economist at
Berenberg Bank, wrote in a research note.
The industrial output and trade data highlighted a gulf with
neighbouring Germany and raised the prospect that the French
economy may have nearly stalled in the third quarter.
While Hollande has relied on tax increases to pursue budget
consolidation this year, he faces virulent resistance and has
already backed down on applying a tax on trucking in the face of
violent protests in western France.
A survey released on Friday showed Hollande's popularity
ratings were lower than any previous head of state in the 55
years of the present, presidential, system, underscoring his
limited room for manoeuvre. The CSA poll showed Hollande's
approval rating at 25 percent, lower than a record held by
conservative Jacques Chirac, president from 1995 to 2007.
"Germany's record trade surplus in September and France's
downgrade by S&P once again highlight the frightening gap
between Germany and other euro zone countries," said Vincent
Ganne, an analyst at FXCM.
A separate survey from French statistics agency INSEE of
executives at industrial firms indicated they planned on cutting
investments this year by 7 percent and 2 percent in 2014.
Philippe Waechter, head of economic research at Natixis
Asset Management, said the debt downgrade reflected views that
the French government was not implementing reforms needed to
repair its economy and relying on hopes of cyclical upturn.
But, he added: "I don't think there will be a dramatic
impact on French debt in the short term, because S&P is not
expressing alarm and the outlook is stable."
The downgrade applies to France's long-term foreign and
local currency debt ratings. S&P said the probability of a
further rating move on France over the next two years was less
than one in three.
Outspoken industry minister Arnaud Montebourg said credit
rating agencies had "no credibility".
"If we pushed this logic to its conclusion, I think states
should start to grade the ratings agencies," he told reporters.
"There would be many dunce's hats to distribute."