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Ratings On France Affirmed At 'AA+/A-1+' On Commitment To Budgetary And Structural Reforms; Outlook Negative

November 23, 2012 | Standard & Poor's

•In our opinion, the French government remains committed to budgetary and
structural reforms that would build on measures it has proposed so far to
improve the country's growth potential.•We are therefore affirming our unsolicited long- and short-term sovereign
credit ratings on the Republic of France at 'AA+/A-1+'.•The outlook on France is negative, indicating that we believe that there
is at least a one-in-three chance that we could lower the ratings during
2013.

Standard & Poor's Ratings Services
today affirmed its unsolicited long- and short-term sovereign credit ratings
on the Republic of France at 'AA+/A-1+'. The outlook is negative.

Our transfer and convertibility (T&C) assessment for France, as for all
European Economic and Monetary Union (eurozone) members, is 'AAA'.

The affirmation reflects our opinion that the French government remains
committed to budgetary and structural reforms that would build on the measures
it has proposed so far and improve the country's growth potential. In
particular, in the face of uncertain economic growth prospects, the government
has already taken steps toward restoring competitiveness, by announcing the
National Compact for Growth, Competitiveness and Employment this month, and
toward compliance with its medium-term budgetary targets.

Our baseline expectation is that the government will press ahead with further
important structural reforms, despite opposition from vested interests which
benefit from long-entrenched entitlements. Substantial reforms would underpin
the government's fiscal consolidation strategy, in our view, and improve
economic growth prospects.

After flat growth this year, we believe that the French economy will grow by
0.4% in real terms in 2013, characterized by:

•The government's ongoing implementation of its consolidation plan,
alongside fiscal tightening in France's key eurozone trading partners;•Wavering consumption levels, rising unemployment, and decelerating wages;•Sluggish investment reflecting among other factors challenged corporate
profitability; and•An uncertain outlook for external demand.We believe the following factors have contributed to a significant erosion of
the French economy's cost- and non-cost competitiveness:

•Structural rigidities in the labor market;•Relatively restrained competition in some services sectors; and•The overall high tax burden.We believe that the reform measures proposed so far--such as introducing
corporate tax credits on firms' payrolls--are useful but insufficient to
significantly unlock economic growth potential. In our view, business growth
is unlikely to improve substantially without deeper labor and services-sector
reforms--which would reduce barriers to entry and introduce competition to
regulated professions--as well as cut back red tape for businesses. Our
ratings affirmation is based on our view that additional reforms will be
implemented in the near term, reflecting the government's willingness to build
on the benefits of measures proposed so far to unlock France's growth
potential.

In our opinion, labor and service-sector reforms would be positive for
competitiveness, economic growth, and, in turn, sovereign creditworthiness.
They would likely reduce unemployment over the medium term and relax existing
structural rigidities such as the relative insensitivity of wages to the
economic cycle, the duality of open-ended and fixed-term contracts, and
legislation related to hiring and firing. We believe such reforms would be key
to improving employment incentives for both employees and employers.

Since it took office in May 2012, the government has asserted its commitment
to deficit targets by adopting revenue- and spending-side measures as well as
strengthening the fiscal framework. It has detailed a multiannual public
finance planning act and has established a high council for public finances,
among other steps.

France's tax burden remains very high relative to other advanced economies at
more than 46% of GDP over 2012-2015 (with general government revenue at around
53% of GDP), while we project general government spending will stay above 56%
of GDP over the same period, the highest in the eurozone. We forecast a
general government deficit of 4.5% of GDP in 2012 in line with the
government's target, and 3.5% in 2013 (2013 government target: 3.0%). Our
projection of higher-than-targeted general government deficit for 2013
reflects our forecast for weaker GDP growth. Consequently, we estimate gross
debt--excluding the European Financial Stability Facility guarantees--to
exceed 91% of GDP in 2013 (with net general government debt at around 85% of
GDP), and to stabilize at around that level thereafter (see "S&P Clarifies Its
Approach To Accounting For EFSF Liabilities When Rating The Sovereign
Guarantors", published Nov. 2, 2011).

We view France as a sovereign benefitting from a wealthy, highly diversified,
and resilient economy with a skilled and productive labor force and a high
rate of savings.

The outlook on the long-term rating on France is negative, indicating that we
believe that there is at least a one-in-three chance that we could lower the
rating during 2013 if we saw that:

•Economic growth prospects deteriorate further or the authorities fail to
significantly overhaul the labor market and services sectors; or•France's general government deficit were to remain close to current
levels, leading to a gradual increase in the net general government debt
to more than 100% of GDP; or•Heightened financing and economic risks in the eurozone were to
significantly increase France's contingent liabilities, or materially
worsen external financing conditions.Conversely, the outlook could return to stable if the authorities can reduce
the general government deficit such that the public debt ratio stabilizes in
the next two-to-three years. Substantial structural reforms that improve
economic competitiveness and support growth could also help stabilize the
ratings.

Company: France

Full company nameFrance
Country of riskFrance

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