France’s credit rating was cut by Moody’s Investors Service, which said slow economic expansion and political constraints will hamper the country’s ability to reduce its debt burden.
The nation’s credit grade was lowered one step to Aa2, the third highest investment-grade level, Moody’s said in a statement Friday. The country’s outlook was changed to stable from negative, according to the company.
“Low growth and institutional and political challenges to reforms make it unlikely that we will see a material reduction in the government’s high debt burden over the rest of this decade,” Moody’s wrote in the report.
President Francois Hollande is squeezing spending and slashing taxes on businesses in a bid to reduce the government’s budget shortfall and revive an economy that has barely expanded in three years. Finance Minister Michel Sapin said on Sept. 16 that the nation will meet its deficit-reduction commitments and is on track to grow 1 percent in 2015, the most since 2011.
The budget deficit will drop to the equivalent of 3.8 percent of gross domestic product in 2015, 3.3 percent in 2016 and below the 3 percent bar in 2017, according to Sapin.
“Spending is falling, that is the proof we are keeping our promises,” he said.
Government spending will drop to 55.1 percent of GDP next year, down from 55.8 this year and 56.4 percent in 2014. At the same time, lawmakers committed to cutting taxes and social charges on business by 50 billion euros over the course of three years.
Investors have largely shrugged off downgrades, reflecting a shift to a focus on in-house analysis from reliance on ratings companies. Since France first lost its AAA rating with Standard & Poor’s in January 2012, the yield on the country’s benchmark 10-year government bond has dropped to about 1 percent from more than 3 percent.
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