The Downgrade of France

On November 19, 2012, Moody’s downgraded France one notch from Aaa to Aa1. There are two key questions:

  1. why did it take so long? and
  2. why only downgrade one notch?

Downgrade history

S&P downgraded France in January of 2012. However, S&P downgrade the U.S. in August of 2011. Until yesterday, Moody’s considered France and the U.S. to be equally risky. It is stupefying that any reasonable person would consider France either equal or less risky than the U.S. [See Moody’s report here.]

Why I would advocate a bigger downgrade for France?

Here are some of the reasons:

  • Total debt (government, corporate, private) to GDP greater than Italy or Spain
  • 40 consecutive years of government fiscal deficits
  • Unemployment rate is now 11% (9.5% last year) and is the highest in 13 years (Germany unemployment is the lowest in 30 years)
  • 0% GDP growth over past 18 months
  • Banks dangerously levered and many already zombied
  • Government spending 56% of GDP (U.S. and Germany in low 40s)
  • Uncompetitive labor costs
  • Extravagant social programs with retirement in many cases before 60
  • Deficit target of 3% of GDP in 2013 is widely consider a “joke”

Hence, the doowngrade should have been multiple notches and the downgrade should have happened long ago. Who are the credit rating agencies trying to fool?

What does this mean for Europe?

Here are some quick thoughts:

  • The first shoe to fly in the disintegration of Euro is France
  • France will have no choice but to cut government spending
  • There are more pensioners than farmers and farm subsidies/benefits will be cut
  • As in past, farmers will disrupt the economy, blocking highways, airports
    and eventually send France into economic death spiral
  • There is no Euro without France

France will raise taxes on rich to finance its deficit

I have no problem with people paying their fair share of the tax burden. However, beware and learn some lessons from overseas.

  • France counting on €20 billion in extra tax revenue from taxing rich
  • I doubt they will get a quarter of that. People are moving to Belgium and to London
  • These measures are a back door stimulus for neighboring countries and will hurt France in long run.
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