One Less In The AAA Club: Moody's Downgrades FrAAnce From AAA To Aa1 - Full Text

Tyler Durden's picture

After hours shots fired, with Moody's hitting the long overdue one notch gong on France:


Euro tumbling. In other news, UK: AAA/Aaa; France: AA+/Aa1... Let the flame wars begin

From the release:

Moody's decision to downgrade France's rating and maintain the negative outlook reflects the following key interrelated factors:
1.) France's long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets.
2.) France's fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term due to subdued domestic and external demand, and in the longer term due to the structural rigidities noted above.
3.) The predictability of France's resilience to future euro area shocks is diminishing in view of the rising risks to economic growth, fiscal performance and cost of funding. France's exposure to peripheral Europe through its trade linkages and its banking system is disproportionately large, and its contingent obligations to support other euro area members have been increasing. Moreover, unlike other non-euro area sovereigns that carry similarly high ratings, France does not have access to a national central bank for the financing of its debt in the event of a market disruption.



The first driver underlying Moody's one-notch downgrade of France's sovereign rating is the risk to economic growth, and therefore to the government's finances, posed by the country's persistent structural economic challenges. These include the rigidities in labour and services markets, and low levels of innovation, which continue to drive France's gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base.

 The rise in France's real effective exchange rate in recent years contributes to this erosion of competitiveness, in particular relative to Germany, the UK and the US. The challenge of restoring price-competitiveness through wage moderation and cost containment is made more difficult by France's membership of the monetary union, which removes the adjustment mechanism that the ability to devalue its own currency would provide.

Apart from elevated taxes and social contributions, the French labour market is characterised by a high degree of segmentation as a result of significant employment protection legislation for permanent contracts. While notice periods and severance payments are not significantly higher than they are in other European countries, some parts of this legislation make dismissals particularly difficult. This judicial uncertainty raises the implicit cost of labour and creates disincentives to hire. In addition, the definition of economic dismissal in France rules out its use to improve a firm's competitiveness and profitability.

Moreover, the regulation of the services market remains more restrictive in France than it is in many other countries, as reflected in the OECD Indicators of Product Market Regulation. The subdued competition in the services sector also has a negative effect on the purchasing power of households and the input costs of enterprises. France additionally faces significant non-price competitiveness issues that stem from low R&D intensity compared to other EU countries.

Moody's recognises that the government recently announced measures intended to address some of these structural challenges. However, those measures alone are unlikely to be sufficiently far-reaching to restore competitiveness, and Moody's notes that the track record of successive French governments in effecting such measures over the past two decades has been poor.

The second driver of today's rating action is the elevated uncertainty with respect to France's fiscal outlook. Moody's acknowledges that the government's budget forecasts target a reduction in the headline deficit to 0.3% of GDP by 2017 and a balancing of the structural deficit by 2016. However, the rating agency considers the GDP growth assumptions of 0.8% in 2013 and 2.0% from 2014 onwards to be overly optimistic. On top of rising unemployment, France's consumption levels are being weighed down by tax increases, subdued disposable income growth and a correction in the housing market. Net exports are unlikely to drive economic activity in light of reduced external demand, in particular from euro area trading partners such as Italy and Spain.

As a result, Moody's sees a continued risk of fiscal slippage and of additional consolidation measures. Again, based on the track record of successive governments in implementing fiscal consolidation measures, Moody's will remain cautious when assessing whether the consolidation effort is sufficiently deep and sustained.

The third rating driver of Moody's downgrade of France's sovereign rating is the diminishing predictability of the country's resilience to future euro area shocks in view of the rising risks to economic growth, fiscal performance and cost of funding. In this context, France is disproportionately exposed to peripheral European countries such as Italy through its trade linkages and its banking system.

Moody's notes that French banks have sizable exposures to some weaker euro area countries. As a result, despite their good loss-absorption capacity, French banks remain vulnerable to a further deepening of the crisis due to these exposures and their significant -- albeit reduced -- reliance on wholesale market funding. This vulnerability adds to the government's contingent liabilities arising from the French banking system.

Moreover, France's credit exposure to the euro area debt crisis has been growing due to the increased amount of euro area resources that may be made available to support troubled sovereigns and banks through the European Financial Stability Facility (EFSF), the European Stability Mechanism (ESM) and the facilities put in place by the European Central Bank (ECB). At the same time, in case of need, France -- like other large and highly rated euro area member states -- may not benefit from these support mechanisms to the same extent, given that these resources might have already been exhausted by then.

In light of the liquidity risks and banking sector risks in non-core countries, Moody's perceives an elevated risk that at least part of the contingent liabilities that relate to the support of non-core euro area countries may actually crystallise for France. The risk that greater collective support will be required for weaker euro area sovereigns has been rising, most for notably Spain, whose economy and government bond market are around twice the combined size of those of Greece, Portugal and Ireland. Highly rated member states like France are likely to bear a disproportionately large share of this burden given their greater ability to absorb the associated costs.

More generally, further shocks to sovereign and bank credit markets would further undermine financial and economic stability in France as well as in other euro area countries. The impact of such shocks would be expected to be felt disproportionately by more highly indebted governments such as France, and further accentuate the fiscal and structural economic pressures noted above. While the French government's debt service costs have been largely contained to date, Moody's would not expect this to remain the case in the event of a further shock. A rise in debt service costs would further increase the pressure on the finances of the French government, which, unlike other non-euro area sovereigns that carry similarly high ratings, does not have access to a national central bank that could assist with the financing of its debt in the event of a market disruption.

Today's rating action on France's government bond rating was limited to one notch given (i) the country's large and diversified economy, which  underpins France's economic resiliency, and (ii) the government's commitment to structural reforms and fiscal consolidation. The limited magnitude of today's rating action also reflects an acknowledgment by Moody's of the French government's ongoing work on a reform programme to improve the country's competitiveness and long-term growth perspectives, with key measures expected to be outlined in the National Pact for Growth, Competitiveness and Employment. Moreover, on the fiscal side, the European Treaty on the Stability, Coordination and Governance of the Economic and Monetary Union (TSCG), known as the "fiscal compact", will be implemented through the Organic Law on Public Finance Planning and Governance.


Moody's decision to maintain a negative outlook on France's government bond rating reflects the weak macroeconomic environment, and the rating agency's view that the risks to the implementation of the government's planned reforms remain substantial. Moreover, Moody's currently also holds negative outlooks on those Aaa-rated euro area sovereigns whose balance sheets are expected to bear the main financial burden of support via the operations of the EFSF, the ESM and the ECB. Apart from France, these countries comprise Germany (Aaa negative), the Netherlands (Aaa negative) and Austria (Aaa negative).


Moody's would downgrade France's government debt rating further in the event of additional material deterioration in the country's economic prospects or difficulties in implementing reform. Substantial economic and financial shocks stemming from the euro area debt crisis would also exert further downward pressure on France's rating.

Given the current negative outlook on France's sovereign rating, an upgrade is unlikely over the medium term. However, Moody's would consider changing the outlook on France's sovereign rating to stable in the event of a successful implementation of economic reforms and fiscal measures that effectively strengthen the growth prospects of the French economy and the government's balance sheet. Upward pressure on France's rating could also result from a significant improvement in the government's public finances, accompanied by a reversal in the upward trajectory in public debt.


France's foreign- and local-currency bond and deposit ceilings remain unchanged at Aaa. The short-term foreign-currency bond and deposit ceilings remain Prime-1.

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Neethgie's picture

Europe is fucked.. i can't wait for the eu to die..

xamax's picture


redpill's picture

OMG look at that chart!  It's the dreaded TRON RECOGNIZER pattern!

Dalago's picture

Moody's and everyone else but Egan Jones gets paid from their issuer.  Its like I'm paying you to make me look good.  Moody's, S&P, and Fitch are on the sell side.  EJ is on the buy (our) side.  So I'm guessing that the EU is much worse that what these worthless rating agencies (sans EJ) will publish.  I'll be celebrating like this when the EU finally falls:

TruthInSunshine's picture

As the talking heads harped incessantly about PIIGS, I was speaking of PIIGS+France+U.K. last year (which another ZH member acronym-ized as PIIGSFUK).

France's & the UK's economies are severely contracting in real terms currently. Just like in the U.S., the proxy information disseminators of the government are pushing the pedal to the metal to pump out headlines and newscasts to distract the sheeple from the economic implosion taking place, and to do everything possible to project an illusion of relative economic normalcy.

Most intelligent life forms now recognize the reality that the EU will be radically re-shaped, and will not even remotely resemble what it did prior to 2008.

Some of these same intelligent life forms also now realize that one of the reasons for this is that the fractional reserve central banks, with two of these most prominent cartel members having their headquarters in London & New York, respectively, not only are not attempting rational monetary policy, but for whatever reason (anyone is free to add their conjecture and postulates as to the why), are engaged in monetary policy that has the effect of breaking markets, sowing uncertainty & debasing living standards.

If people want to know what the U.S. will look like in 20 to 30 years, just look to the U.K.  We are literally 20-30 years behind the U.K.'s footsteps in terms of living standards, real economic productivity & standards of living.

This makes perfect sense as the BOE & Federal Reserve are twins born of the same mother, serving the same masters.

DoChenRollingBearing's picture

Hmm, if the UK is, call it 20 years "ahead" of us, and IF gold matches its price rise since then, that would imply gold at $6000 or more.  Yeah, I know, just one inaccurate and bad metric, but just sayin'...

Chupacabra-322's picture

Yup.  I'm just waiting on a GLD margin call rise so I can go ape shit on a spending spree.

old naughty's picture

"One less in the AAA Club..."

How many left (not that they matter)? Wait till the last one down, where will gold be?

TruthInSunshine's picture

In my response above, I mistakenly stated "living standards" twice, when I meant to include a "massive wealth divide" (aka continued annihilation of the middle class that made the U.S. the most powerful nation at one time, probably near 1968; the larger a true middle class of a nation, coupled with the a system that allows for the bright and/or motivated to rise the economic ladder, the more powerful it is).

The U.K. has a true FIRE economy now, with a manufacturing sector approximately 1/8th the size it was, in real terms (relative to overall GDP), during the period that Britain was the preeminent world power. Today, London, with its various financial zombies & overpaid employees, subsidized off the teat of the British taxpayer, might as well be a different nation than the rest of the U.K., in terms of cost of living, standard of living, and the mind blowing government subsidization it receives.

New York City is the U.S.'s London, for the same reasons.

It beyond ironic that New York City is the bastion of liberalism in the U.S., yet New York City probably has the largest wealth divide, and smallest relative middle class, of any city in the country.

nmewn's picture

"...but for whatever reason (anyone is free to add their conjecture and postulates as to the why), are engaged in monetary policy that has the effect of breaking markets, sowing uncertainty & debasing living standards."

There was a time, I believed they were just incompetent. Now there can be no doubt that they (the NY investment banks & government) wish to enslave their respective populations.

Not the chains & bondage type enslavement...but the "needy kind" of enslavement. What does it say about a government that takes away the ability to move upwards for entire segments of a society while promising them treats if they just continue to support it's actions?

Furthermore, what does it say about those who readily succumb to it?

Just gimme my free shit, fuck my neighbor, I don't like him anyways, he's got a better job, foxier wife, bigger boat...yes, this is how its done. Envy, greed...followed by fraud, graft & corruption...all aboard!!!

Michaelwiseguy's picture

American news agencies should be declared criminal organizations using psychological operations on the people.

They should be required to display a warning label; Lies of omission and brainwashing tactics are being used on our viewers 24/7. Buyer beware.

Overfed's picture

Really think it'll take 20-30 years? Things are accelerating. Give it 10, max. Notwithstanding a financial/social collapes, which is certainly well within the realm of possibility.

RealFinney's picture

Missing out on calling it IFUKPIGS there, surely...

TruthInSunshine's picture


Or iFuckpiigs, given the new iEconomy-- which recently had a New York Times article discussing it, wherein they decried the injustice of those who write mobile apps for Apple and Android not being able to sufficiently supplement their incomes in these tough times:


As Boom Lures App Creators, Tough Part Is Making a Living

As Boom Lures App Creators, Tough Part Is Making a Living


ROSEDALE, Md. — Shawn and Stephanie Grimes spent much of the last two years pursuing their dream of doing research and development for Apple.


But they did not actually have jobs at Apple. It was freelance work that came with nothing in the way of a regular income, health insurance or retirement plan. Instead, the Grimeses tried to prepare by willingly, even eagerly, throwing overboard just about everything they could.


They sold one of their cars, gave some possessions to relatives and sold others in a yard sale, rented out their six-bedroom house and stayed with family for a while. They even cashed in Mr. Grimes’s 401(k).


“We didn’t lose any sleep over it,” said Mr. Grimes, 32. “I’ll retire when I die.”




Yet with the American economy yielding few good opportunities in recent years, there is debate about how real, and lasting, the rise in app employment might be.


Despite the rumors of hordes of hip programmers starting million-dollar businesses from their kitchen tables, only a small minority of developers actually make a living by creating their own apps, according to surveys and experts. The Grimeses began their venture with high hopes, but their apps, most of them for toddlers, did not come quickly enough or sell fast enough..



Boeing Boy's picture

You talk utter bollox.


From someone who has been visiting the US 2-3 times a month for the last several years and who resides in the UK.  Coming to US is like visiting an analogue country compared with Europe.  You haven't got a single clue what you are talking about.

Boeing Boy's picture

Ha, you have a US Govt exercising the lack of financial discipline onw would normally associate with Argentina and state that you have 20-30 years lead on the UK?  


Listen, the drugs don't work.  Friday night turns into FRi Sat, followed by the whole weekend then thursday's as well...

Jethro's picture

And the market yawns with a "mon do me!". Same as it ever was. Same as it ever was.

Fredo Corleone's picture

Tu as volé mon tonnerre, Nmewn...

Aa1 ? C'est la merde !

nmewn's picture

"Tu as volé mon tonnerre"

Sorry bout that...yeah, everyones looking at everyone else saying to themselves "You're gonna Welsh on me aren't you?" way to run a capital market.

Ahhh well, tax the rich, feed the poor, till there are no rich no more...Ten Years After...

GoinFawr's picture

Great tune. Here's another: Locomotive Breath

"No way to slow down..."

nmewn's picture

Big piles of it...everywhere.

zorba THE GREEK's picture

The distance between Aa1 and ccc is shorter than any country is willing to admit.

HoofHearted's picture

Next up: BBBelgium, GermAA+ny, SPA-in, ItA+ly...see how much fun this is.

Only problem is GrEEce is more like a shoe size than a sovereign rating.

spankfish's picture

I would prefer DD's myself... just sayin'

zorba THE GREEK's picture

There is no problem rating GreeCCCes debt.

Beam Me Up Scotty's picture

Its more like tick, tick, tick, tick, tick, tick, tick........still waiting for the BOOM.

stocktivity's picture

It's all Bullshit! S&P 1386.89 today...up from 666 four years ago. Rally on!

samcontrol's picture

i can,t wait for the US to die ... how do you like that?

koaj's picture

they need to raise taxes...oh wait

VonManstein's picture

Fitch gonna whack USA next?

TruthInSunshine's picture


Corporations are people, and H.R. 4310: National Defense Authorization Act for Fiscal Year 2013 is a done deal, so they're rightfully fretful of waves of drone attacks.

fonzannoon's picture

In other news Egan Jones laughs out loud.

BKbroiler's picture

as does Sarkozy.  Hollande is a douche.

fuu's picture

While scratching all 10 of his balls.

Cheshire's picture

Yep. The bailers become the bailees

HelluvaEngineer's picture

Wait - why did they tell me to follow the herd and buy the Euro today?

Big Ben's picture

To get the real rating, just subtract 15 notches from Moody's.


Just subtract Moody's and let the market decide the rating. 

Unprepared's picture

Why would any one trust any rating agency that desribes itself as moody, poor or far-fitched?