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.
For each of these there could be offsetting elements and a downgrade would not be automatic if one materialized, he said.
S&P has said that it could firm up its current rating and change the outlook to stable if deficit-cutting measures meant France’s debt ratio stabilized in the next two to three years.
The government forecasts that its debt-to-GDP ratio will start shrinking in 2015, dropping to 93 percent from 94.3 percent in 2014 and 93.6 percent in 2013.
“We see the French general government debt increasing this year and next ... It remains to be seen whether it can stabilize in 2015,” Mrsnik said.
Asked whether the European Commission’s proposal to extend France’s budget deficit target by two years would affect the rating, Mrsnik said the firm would take into account any new French policies.
Despite losing its AAA ratings from both S&P and Moody’s last year, France has been borrowing at record low rates with the help of cheap money being pumped into financial markets by major central banks.
The other major ratings agency, Fitch, still rates France AAA.
Reporting by Ingrid Melander; Editing by Ruth Pitchford