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France Keeps Its AA- Plus Rating

g76p8fyw-1350430160By Gabriele Parussini

Standard & Poor's Ratings Services Friday confirmed France's double-A-plus rating, offering an important endorsement of President François Hollande's measures to boost the economy just days after rival Moody's Investors Service stripped the country of its triple-A ranking.

"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," S&P said.

The decision removes the immediate threat of another downgrade of France, though S&P kept a negative outlook on the country's debt. That indicates a one-in-three chance of a cut in France's credit rating during 2013.

In the six months since Mr. Hollande's election, the outlook for the French economy has darkened considerably. Economists warn that France risks being left behind other euro zone countries, such as Spain and Italy, who are embarking on deeper reforms of their labor markets to help navigate a path out of the crisis.

Earlier this month, Mr. Hollande unveiled €20 billion ($25.78 billion) of tax breaks over three years that will allow firms to cut labor costs by about 6%. The resulting shortfall in government finances will be funded in part by spending cuts and in part by an increase in a form of sales tax.

Moody's cited the competitiveness plan on Monday as one of the reasons behind its decision to lower France's rating, saying it was "unlikely to be far—reaching" enough.

S&P took a different tack. The agency said it wasn't only encouraged by Mr. Hollande's plan, but it also expects the government to "press ahead with further important structural reforms, despite opposition from vested interests which benefit from long-entrenched entitlements."

"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," S&P said.

The French government is shepherding talks between unions and businesses to make the country's labor market more flexible. Mr. Hollande asked the involved parties to reach an agreement by the end of the year, failing which the government will present its own bill to Parliament.

French government bond yields, which move inversely to prices, moved a touch lower on S&P's decision. The yield on the benchmark 10-year French bond fell 0.02 percentage point from Thursday's close to trade at 2.16%. That is up 0.09 percentage point from Monday, before Moody's downgraded France.

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