Fitch Ratings cut France’s credit grade by one notch to “AA” on Friday, saying that Paris’ efforts to trim its fiscal deficit have fallen short of avoiding the downgrade.
“The weak outlook for the French economy impairs the prospects for fiscal consolidation and stabilizing the public debt ratio,” the ratings agency said.
The “AA” grade — two steps below the top triple-A rating — was decided despite France having reduced its projected deficit for fiscal 2015 from 4.3 percent to 4.1 percent of GDP, under pressure from the European Commission.
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“On its own, this will not be sufficient to significantly change Fitch’s projections of France’s government debt dynamics,” the agency said. “The 2015 budget involves a significant slippage against prior budget deficit targets.”
Fitch said that the draft 2015 budget projected government debt to GDP ratio would peak at 98 percent in 2016, higher and later than previous projections.
However, the agency doubted those targets could be met.
“Even under the official forecast, the capacity of the public finances to absorb shocks has been significantly reduced,” it said.
“Fitch expects the debt to GDP ratio to peak higher at close to 100 percent of GDP, with a slower decline to 94.9 percent of GDP by the end of the decade,” the ratings agency said.
The agency said the outlook for the rating was stable, envisaging no downgrade (or upgrade) in the next several months.
However, it said its own fiscal projections for the eurozone’s second-largest economy risk being overoptimistic in part “owing to the uncertain outlook for GDP growth and inflation in the near term.”
Secondly, it cited “increased uncertainty over the government’s ability to deliver on a fiscal consolidation path.”
“Reflecting these concerns, Fitch’s medium-term growth forecasts are somewhat weaker and budget deficits wider than official projections,” the agency added.
In response to the downgrade, French Minister of Finance Michel Sapin said that the government was narrowing its budget gap while supporting growth.
“In a difficult economic environment in Europe, the government is sticking to its path... pursuing the reforms necessary to strengthen growth and make businesses more competitive,” he said in a statement.
“The policy has begun to produce results, with companies benefiting from the initial effects of tax reductions, which will continue in the coming years,” Sapin said.
Meanwhile, Standard & Poor’s maintained its triple-A rating for British sovereign debt on Friday, but said that public borrowing was likely to be higher than the government has forecast and it might need more revenues from taxes.
S&P also said Britain’s economy would suffer if it left the EU, something that British Prime Minister David Cameron’s Conservative Party wants to hold a referendum on if it continues to hold power after the national election in May next year.
Additional reporting by Reuters
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