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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slaughterer's picture

30 pips--not a big deal, as we learned from the US downgrade.  Everybody expected it.  Priced in. Now we can relax.  And rally.  

spastic_colon's picture

yep....will evaporate when everyone realizes it was already front-ran today

CrashisOptimistic's picture

You do realize 2011 was a down year for the market?

VonManstein's picture

that explains todays market action then.

Neethgie's picture

i hate how undramatic ratings agencies are.. and fyi there should not be a rating system as it is at current...

It doesn't say anything really.. it should be based on Will i recieve the purchasing power of this money back + interest.. yes or no..

if answer is no then the bonds are junk

if answer is yes then good...


piliage's picture

Have no fear, boosting the common agricultural policy for French farmers will fix everything right back to AAA in a jiffy. It is great, Spanish, Italian, English, and German tax payers pay 600 Euros a year to subsidize French farmers. What could possibly go wrong?

Conman's picture

Lol - muppets get skewered as always.

cdude's picture

France @ Moody's ...Your mother is a hampster and your father smelt of elderberries. Go away before I fart in your general direction.

BraveSirRobin's picture

I've already run far, far away.

Rustysilver's picture

They still have two a's. That's go, no

Herodotus's picture

Standard & Poors have summoned the French finance minister to a meeting next week which is to be held in a railway carriage in a clearing in a forest outside Compiegne.

hairball48's picture

Wasn't that  last Sunday? :)

magpie's picture

T'is but a fleshwound.

The Greek and Spanish bailouts will be adjusted accordingly.

XitSam's picture

Downgrade is bullish! War is peace! EBT cards are food! Bailouts are growth! Paper is money!

Chuck Walla's picture

They need some Fed Firecrackers!

vote_libertarian_party's picture



Bailing out Ireland, Cyprus, Portugal, Italy, Spain, Greece, Belgium, all of the banks, etc. can negatively effect your finances?


Sucre Bleu! (blue sugar?)

Frank N. Beans's picture

oooooo  yeahhhh this is a BIG FUCKING DEAL!!  the Euro TUMBLES 0.0001%.   I am SHOCKED. 


Bay of Pigs's picture

All Hail King Doelarr!

GoinFawr's picture

Well SuM00dy had to do some'at, and queek!  After all, everyM00dy love$ SuM00dy.

Satan's picture

So basically Moody's get their research from The Economist.

Surrealist's picture

HOLD ON! This can't be! Spain's PM Rajoy says the worst of the euro crisis is now over!

Catflappo's picture

When the US was downgraded the 10yr yield was 3 point something or other and now its 1.60%.

The French should be delighted as the downgrade is likely to help their credit-worthiness, not hamper it.


It's the new normal!


RmcAZ's picture

Downgrades are the new upgrades

spankfish's picture

What took so long?

Stockmonger's picture

Let the competitive devaluation spiral begin!

Eternal Complainer's picture

Moody's engaged in terra?

JuliaS's picture

To ease the bond rating process, I propose we add a miniscule, a super small and a so-tiny-that-it's-almost-not-even-there "a" letters to the English alphabet.

Yen Cross's picture

 Deep fried frog anyone? ;-)  Frances banks are already shit, so this is just a small formality.

cardis's picture

YC; It's over hotdogs. Replaced by chiens chauds.

Yen Cross's picture

The 1980 movie , is supposed to be a comedy as well.

GoinFawr's picture

Je regarder d' CAD traverser pour la EUR poutine confirmer.

Yen Cross's picture

 That's an interesting trade. What time frame are you looking at?

Orly's picture

That's like 2300-pips!  No way!

Fíréan's picture

The chart presented here is a load of bollex in that it is clearly edited to give only  a partial picture of the most recent days trading : the telling part is edited out on the left hand side.

16th novermber the EUR/USD traded at a dip of 1.27.  Rose to a peak 19th of 1.2810+ ( 17/18th was weekend) before the present dip shown in chart accompanying this artcile. The dip shown here is minor by comparisonto the rise since last friday,  yet the reader isn't given the full picture to make such comparison. Go look at a chart showing full last week's trading moves.

GoinFawr's picture

vous etes la chat...

non non, sérieusement, je suis joker.

Quantum Nucleonics's picture

Next up, downgrading of the USAaa to USAa.

Quantum Nucleonics's picture

Considering the socialst wacko they have running France, they should be thankful it wasn't a two notch downgrade. 

The Alarmist's picture

Dammit, I just found a thousand francs in an old envelope in my desk, so even if the Banque de France reopens the window, whatever they give me in exchange will still be worthless.

chump666's picture

UK should be junk.


Orly's picture

The whole charade has been to prop up the Great British Pound Sterling because it was the one that really imploded after Lehman.  Lloyd's, RBS, etc...

What happened to the half-trillion dollars, Mr. Chairman?

Now, their mouthpieces are saying publicly that this isn't working so it makes me wonder what the next move is going to be...

Did they fix it enough where they're ready to take the hit?  Does the GBPUSD cross return to 1.53? Or lower?  That would take a tsunami of "risk-off" but with France being downgraded, who knows what happens in equity markets now.


ekm's picture

Nothing's gonna happen.

The market cannot fall, it can only crater.

Timing of it is impossible, it could be tomorrow, it could next month it could be next year, but crater it will.

FinalCollapse's picture

Bullish! The Fed traders with unlimited digital $$$, big computer screens and tiny dicks are ready to buy everything.

real's picture

im sorry first i must say i drank to much tonight, second i thought it wise to goggle deficits and budgets with projections. and All i can say is everyone on here is an ass. it is obvious we have become delusional so why are we sitting here typing to each other. dont you think its time to walk out with the guns and start shooting? I just saw the movie Lincohn and that is a wonerful example of why we should just start shooting.

Yen Cross's picture

Here are the DOW/ES  CFD's currently.


  US 30 12757.00 12795.96 12794.00 12753.00 -38.96 -0.30% 23:25:58   SPX 500 1383.45 1386.89 1388.15 1382.75 -3.44 -0.25% 23:28:07
jubber's picture

French bonds at an ATH good opportunity to get short

lolmao500's picture

America, the UK, Germany (if they agree to one more bailout of anyone) need to be downgraded by every rating agencies pronto.

jomama's picture

took them long enough.

KarlGDenninger's picture

I am not worried. In the past four months I have practiced and perfected the art of eating and recycling my own feces. I will not starve and I have no need to prep for armaggedon