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Last updated: November 8, 2013 6:04 pm

France rating downgrade heaps pressure on François Hollande

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François Hollande’s stuttering effort to revive the French economy suffered another setback when Standard & Poor’s lowered the country’s credit rating and criticised its high taxes and flagging structural reforms.

The ratings downgrade came after a testing few weeks for the French president that have featured strikes by Brittany farmers and professional footballers over taxes that are among the highest in the western world.

Mr Hollande’s approval ratings have slipped to record lows.

“The downgrade reflects our view that the French government’s current approach to budgetary and structural reforms to taxation, as well as to product, services and labour markets, is unlikely to substantially raise France’s medium-term growth prospects,” S&P said in a statement on Friday.

“Moreover, we see France’s fiscal flexibility as constrained by successive governments’ moves to increase already-high tax levels, and what we see as the government’s inability to significantly reduce total government spending.”

S&P’s concerns echo criticisms that have come in recent months from both Brussels and Berlin, where German government officials have privately said Mr Hollande’s lack of ambitious economic reforms is one of the biggest challenges to the eurozone as it struggles to emerge from two years of recession.

News of the one-notch downgrade to double A was compounded by French industrial output figures that unexpectedly fell in September by 0.5 per cent from the previous month, raising concerns over the third-quarter growth figures coming next week.

The French government immediately hit back at the rating agency, with Pierre Moscovici, the French finance minister, saying he “regrets the inaccurate and critical judgments made by the rating agency Standards and Poor’s”.

The downgrade “reaffirms the determination of the entire government to follow the path already laid out to reduce the public deficit, restore competitiveness and support economic growth and employment,” he said.

The government has seen other more popular revolts over taxes in recent weeks, with a series of demonstrations by farmers, food industry workers, transport and other businesses in Brittany over a new “ecotax” on large vehicles.

Breton farmers and other protesters wearing red bonnets – the symbol of a local 17th-century tax revolt – have attacked posts set up to monitor vehicles for the tax and blocked roads with dumped cauliflowers.

France’s top football clubs also threatened to cancel all games for one weekend later this month, protesting against the 75 per cent income tax bracket on salaries above €1m which they said threatened to bring about “the death of French football”.

Mr Hollande has acknowledged growing public intolerance of some €60bn in new taxes brought in over the past three years, heavily augmented by his own administration.

At 46 per cent of gross domestic product, France has one of the highest tax burdens among advanced economies.

Economists have been critical of the government for not going far enough with reforms.

“The slowdown in structural reforms in France has been particularly visible since the spring,” said Fabrice Montagne, economist at Barclays, adding there were “no serious prospects of improvement before the municipal elections in May 2014”.

The far-right French National Front is expected to perform well in the municipal and European elections in March and May next year due to government unpopularity, with the party decisively winning a local by-election last month.

In Brussels, the European Commission in May issued detailed economic recommendations to Mr Hollande – which under new EU crisis-fighting regulations carry the threat of heavy sanctions – that urged him to take bolder reform measures.

Olli Rehn, the EU economic commissioner, is due to weigh in on Mr Hollande’s 2014 budget next week and has already hinted he will require Paris to do more.

French government borrowing costs jumped on news of the downgrade, with the French 10-year yield, which move inversely with prices, up 7 basis points at 2.2 per cent by late afternoon in London.

S&P was the first agency to strip France of its triple A rating in January last year, although both Moody’s and Fitch have since also taken away the country’s top rating. Following Friday’s move, S&P’s rating on France is now one notch below those of its two rivals.

The OECD club of rich countries recently forecast that the French economy as a whole would grow 0.3 per cent this year. The French government has targeted 0.9 per cent growth next year.

Additional reporting by Josh Noble, Peter Spiegel and Ralph Atkins

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