S&P says France must deliver promised budget cuts to protect rating

Mon May 27, 2013 1:09pm EDT
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By Ingrid Melander

PARIS (Reuters) - France needs to deliver promised budget cuts if it wants to avoid a further credit rating downgrade, Standard & Poor's lead analyst for France told Reuters on Monday.

S&P, which stripped France of its coveted AAA rating in January 2012, could confirm the current AA+ rating if the public debt ratio looked set to stabilize, but analyst Marko Mrsnik says it remains to be seen if France can achieve that in 2015.

"We take on board expectations that in the 2014 budget there will be additional measures that will move the position towards smaller deficits," Mrsnik said.

"We expect mild recession this year and slow recovery thereafter."

The ratings agency forecasts the economy will shrink 0.2 percent this year and grow 0.6 percent next year - half the government's 2014 growth forecast.

S&P expects France will cut its budget deficit to 3.3 percent of output next year from 3.8 percent this year, slightly more pessimistic than the government but more optimistic than the European Commission's projections.

With these forecasts underpinning the rating, one of the main triggers for a downgrade would be if "economic growth prospects deteriorate further or the economy is threatened by continuing rigidities in the labor market and services sector," Mrsnik said.

Other potential triggers would be a jump in national debt to above 100 percent of GDP, from just over 90 percent last year, or a new flare up in the euro zone crisis which drove up French financing costs.   Continued...

A view shows the Standard & Poor's building in New York's financial district February 5, 2013. REUTERS/Brendan McDermid