Survey highlights French weakness prior to downgrade

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The decision by Moody’s to downgrade the French government’s bond rating was anticipated by analysts in the Euromoney Country Risk Survey.

The sovereign’s overall risk assessment has continued on a downward trend this year, with its ECR score falling by 2.1 points since March, after a sharp fall of 5.6 points over the second half of 2011.

France’s overall ECR score of 73.7 is much weaker than other core eurozone members. Its score is 6 points lower than Austria and 8 points behind triple-A rated Germany. France has languished in the second tier of ECR’s five-tier system since September 2010, after it fell 6 places between March and September that year to 18th position.

Lorenzo Naranjo, assistant professor at ESSEC Business School in Paris and a member of ECR’s expert panel, says: “The decision was anticipated by the markets back in January when Moody’s put France on negative outlook.” “Structurally the French economy is not operating at full capacity. France is not as competitive as its neighbours like Germany, labour laws and costs are much higher than the EU average. Social programmes that detract investment were also an important reason behind the downgrade. The government is not reducing the deficit as fast as needed.” ECR analysts have highlighted concerns in the country’s banking stability indicator, which has fallen by 0.4 points (out of 10) since January, the third biggest decline in the region behind Spain and Slovenia. That decline highlights another worrying feature of the eurozone crisis: French exposure to Italy and Spain. The latest preliminary consolidated banking statistics from the Bank for International Settlements in March also indicate that France has the largest proportion of short-term bank lending (of up to one-year maturity): almost 60% of its total bank claims. The French banking system is also the most exposed to other banking sectors. Nearly 61% of its bank lending is to other banks, which is by far the largest proportion of any eurozone country. As ECR reported in August: ‘With French sovereign debt expected to rise to 90% of GDP at end-2012, from 86.4% in 2011, and expected to climb further in the short term as the new government grapples with a bloated budget deficit, banking risk in France is becoming a real issue in spite of reports that the banks are cutting back on their lending abroad.’

This article was originally published by Euromoney Country Risk.