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France’s credit rating downgraded

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20/11/2012
Moody's has stripped France of its AAA credit rating, reducing it by one notch to Aa1.
France’s credit rating downgraded

The ratings agency maintained the negative outlook it had placed on the country’s rating in February.

The agency said the country’s ability to withstand future euro area shocks is diminishing as its own economic profile deteriorates.

At the same time, its banks remain reliant on wholesale funding and exposed to other eurozone nations, while France’s own credit exposure to the crisis has been increasing as a result of eurozone guarantees for peripheral nations, Moody’s added.

The decision leaves Fitch as the only major ratings agency to rate France as an AAA credit, and follows Standard and Poor’s January decision to remove its own AAA rating for France, and comes as a growing number of investors become more wary of the perception of the nation as a stronger member of the eurozone.

Fund manager William Littlewood of Artemis said:

“French labour costs and high regulation make it badly placed to compete in the world, but the new government’s policies will make its highly taxed and regulated economy even more sclerotic. Unemployment has crept up over 10% and the trade deficit – which was a surplus ten yearsago – continues to widen.

“Given its high levels of debt and a large and ever more interventionist government, we believe France will increasingly be compared with the weaker southern European countries.”

Last month Carmignac Gestion founder Edouard Carmignac suggested the country could be forced to overhaul its government as soon as the spring and suggested business activity was about to “plummet”. October also saw PIMCO’s Bill Gross label France as one of his “rogue gallery of debtors”.

Legal & General’s Michael Canoy, manager of the group’s £1.3bn Fixed Income trust, has moved underweight France – preferring Italian credit – in the belief the country will not meet its 0.8% growth target or 3.3% deficit target for 2013.

Elsewhere Threadneedle’s Matthew Cobon, manager of its Absolute Return Bond fund, switched a long France CDS position into a short French bonds position in September, believing French economic fundamentals are yet to be priced in.

There are some positives for France: Q3 GDP came in ahead of estimates at 0.2%, the second successive quarter in which growth had beaten expectations.

Data from Markit, meanwhile, shows while institutional investors appear to be shying away from using long-dated French debt as collateral, investors have not yet turned wholly negative on the nation.

Short interest in French equities, while rising, remains “quite low” at 3.3% for large caps, Markit added.

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