France lost the last of its major “AAA” ratings on Friday in a blow to French President Francois Hollande as his government battles to rein in public finances and kickstart the stalled economy. Fitch cut France’s credit rating by one notch to “AA-plus,” citing a deteriorating debt outlook and an uncertain economic environment as the eurozone crisis risked flaring up anew.
In explaining its cut, Fitch cited a slew of causes for concern including a weaker economic output, a jump in the French unemployment rate, budget deficits and subdued external demand.
Risks to fiscal projections “lie mainly to the downside,” the rating agency said in a statement, keeping a stable outlook on its new rating.
“A debt ratio that is higher for longer reduces the fiscal space to absorb further adverse shocks,” it said.
Fitch raised its estimate for how long it will take France to shave down its debt, forecasting it would peak at 96 percent of GDP next year and still be as high as 92 percent in 2017.
The government projects its efforts to whittle down public spending will have cut its debt to just over 88 percent by then.
The eurozone’s second-largest economy, which fell into a shallow recession in the first quarter of the year, had already lost its prized “AAA” ratings with S&P and Moody’s last year.
Standard & Poor’s rates France at “AA-plus” with a negative outlook. Moody’s rates it “Aa1” with a negative outlook, meaning both agencies see another rating cut likely.
The eurozone’s three-and-a-half-year sovereign debt crisis has strained the monetary union as even major economies such as France continue to feel the pain of stalled growth.
French GDP, flat last year, is expected to drop 0.3 percent this year before expanding 0.6 percent next year, according to the median forecast in a Reuters poll this week.
Although long anticipated, the downgrade is grim news for Hollande as he grapples with dismal approval ratings over his failure to pull the economy out of its slump.
Analysts downplayed the likelihood of any major market impact of what Nicholas Spiro, managing director at Spiro Sovereign Strategy, called a “belated” downgrade, after investors shrugged off other rating cuts over the past months.
However, they said this was a reminder to France that it must press ahead with tough structural reforms to regain competitiveness.
“If Italy’s debt market was able to shrug off this week’s sovereign downgrade, then France’s is even less likely to be affected,” Spiro said.
“However, if there’s one country in which a downgrade ought to be a wake-up call for politicians to step up the pace of fiscal and structural reforms, it’s France,” he said.