Credit ratings agencies are the bookmakers of the financial world. Their job is to provide investors with an accurate assessment of the risks associated with a given debt vehicle; this includes sovereign bonds. Standard and Poor’s (S&P) is one of the three major ratings agencies along with Fitch’s and Moody’s rating agencies.
S&P has just downgraded the outlook for France’s credit to negative, but the rating remains unchanged at AA/A-1+ which is the third highest rating they offer. The assessment means that S&P believes that there is one chance in three that economic events in France could result in the actual credit rating being revised downwards within the next two years (or two chances in three that it won’t, depending on how you like to look at these things). S&P cut the French credit rating to AA in November of 2013.
Michel Sapin, France’s finance minister, was quick to assure investors that French debt continues to be amongst the most secure investments in the world. "French debt is one of the surest and most liquid in the world, with debt levels very much contained. We will pursue the needed reforms, to boost our medium term growth prospects", he noted in a statement.
S&P justified the change to negative outlook because they think that the nation’s finances could continue to deteriorate after this year, in view of France’s struggling economy. Their projections for the French deficit have been downgraded and now suggest that it will average out at 4.1% between now and 2017.
France itself now says that it will take a further two years to get the deficit back under the Eurozone convergence criteria (for joining the Euro) of less than 3% of GDP. The target will not now be met before 2017, two years later than originally forecast. The Bank of France anticipates that Q3 growth will come in at a modest 0.2% - but that is an improvement on Q2’s figure which showed a static economy between April and June.