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Moody’s France Downgrade: French Turkey Au Sauce Hollandaise

By Market OverviewNov 26, 2012 07:54AM GMT Add a Comment
 
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As I was expecting, Moody’s did not raise Turkey’s credit rating to investment grade in its annual review released a day before its credit risk conference in Istanbul on November 21.

I have always argued that while an upgrade is a possibility in 2013, it would be too optimistic to expect one this year, but some analysts were nevertheless hopeful. However, the interesting Moody’s rating decision of the week was not about Turkey: while Americans were getting ready for their annual Thanksgiving turkey dinner, the agency stuffed France by stripping the country of its triple-A rating on Monday.

I argue that the Moody’s downgrade of France does not make a lot of sense. Actually, I think I am misrepresenting my stance. It makes a lot of sense, as William Oman noted in Roubini Global Economics. But the timing seems to be a bit off. I argue that two of the three reasons Moody’s gives for the downgrade do not really make sense.

I would have downgraded France myself as well, but much earlier, not when the country is preparing to undertake ambitious reforms. Speaking of reforms, I think the downgrade might actually be a blessing for France: President Hollande may use it push forward with his reform agenda.

Oh, before I forget: S&P announced that it was keeping France’s rating, which it had already cut, ahead of the pack, early in the year. Many major media outlets, such as Bloomberg, emphasized that S&P saw 1/3 chance of a rating cut next year, which is in line with Moody’s, as the latter noted that further downgrades could be on the way.

For me, equally interesting was the fact that S&P sounded hopeful of reforms: “The French government remains committed to budgetary and structural reform that would build on measures it has proposed so far to improve the country’s growth potential.” Note that this is in contrast with Moody’s, who stated that France does not have a good track record of implementing reform in justifying a cut after the country had agreed on a competitiveness pact.
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