Photo: Flickr.com/Funky Tee
On November 8, for the second time in less than two years, Standard & Poor’s downgraded France’s sovereign debt rating to “AA with a stable outlook,” according to the agency’s report. France’s rating was last downgraded in January of 2012 from AAA to AA+, when Nicolas Sarkozy was still leading the country. The rating agency’s announcement has received very mixed reactions that make it difficult to discern who is being attacked – France or S&P.
S&P predicts that France will fail to enact the economic and social reforms necessary for its economy to grow and recover, citing that the economy should only grow by one percent by 2015. S&P also stated that a steadily high unemployment rate (unwavering at 11.1 percent) and stronger tax burdens have cost the government its financial flexibility.
The rating agency faults Hollande’s government for closing itself off from financial reform, judging that popular support will be difficult to find when high taxes and labor market downfalls pose a persistent problem. According to the agency, the inability to implement proper reform will prevent France from increasing its revenue and reducing its spending.
The reactions of French governmental officials have been consistently defensive. Arguing that S&P’s analysis is “incomplete,” Christian Noyer, Governor of the Bank of France, stated “I must say that another opinion based on the same facts” would have come to the conclusion that “the country is on the right track.”
Economy Minister Pierre Moscovici called the announcement “critical and inaccurate.” In his own turn, Prime Minister Ayrault reassured that “France’s rating remains among the best in the world.”
Ayrault explained that S&P’s analysis did not take enough factors into account, arguing that recently implemented pension reforms were not given enough weight.
France is the second largest economy in Europe after Germany, which has retained the coveted AAA rating. France’s other neighbors like the Netherlands, Austria, and Finland all have higher credit ratings.
But the French government was not the only one defending French economic policy. While some have called the downgrade a wakeup call for Hollande, others have used this “attack” on France as an opportunity to question the expert authority of rating and ranking agencies like S&P. Whether or not the downgrade will make a sizable impact is still being debated. In theory, a lower credit rating makes borrowing more expensive. However the markets have stayed relatively calm in the wake of the news.
While even the long term effects of the downgrade for France are still under debate, but the debate over S&P expert authority has proven to be louder. Arnaud Montebourg, Minister of Industrial Renewal in France responded to criticism with criticism, saying, “I give absolutely no credit to these rating agencies.”
International rating agencies are respected for their expert authority in that they are supposed to be apolitical in their analyses. These organizations take criticism when their methodology is questioned because choosing which factors are included or excluded in the analysis is subjective.
Famed economists like Paul Krugman have stated that S&P’s new rating for France is almost entirely politically motivated. In an op-ed in the New York Times, Krugman states that Standard & Poor’s is “using debt fears to advance an ideological agenda,” namely the agenda of fiscal austerity pushed by Germany. Countries like Portugal, Spain, Ireland, and Greece have all adopted those Germany-approved policies, while France has taken a strikingly different path. In other words, France’s AA rating is a form of “negative propaganda.”
S&P has had to defend itself from angry governments in the past and has done so by saying that “scoring is an art, not a science.” Arguing that these agencies simply state opinions rather than hard facts is still misleading, however, because their results have been incorporated into public discourse as if they were facts. Such common discourse transforms the work of agencies like S&P into a standard by which all countries must operate.
Since the 2008 financial crisis, credit and bond rating agencies, like Standard & Poor’s, Fitch, and Moody’s, have taken a lot of heat for giving AAA ratings to banks that were investing in extremely risky subprime mortgages, thereby misleading investors. It remains to be seen whether France’s downgrade is simply a symbolic and political maneuver or one with direct financial consequences.
