Late yesterday, our friends over at Moody’s decided to slap France with a downgrade, stripping it of its precious AAA rating. This brings it down to Aa1, which is right in line with Standard and Poor’s rating of AA+.
Keep in mind though, that S&P downgraded France TEN months ago, back in January! What the heck took Moody’s so long?
Whatever Moody’s reasons were for delaying, the rating agency now sees enough weakness in the French economy to justify the lowered rating. In its statement, Moody’s pointed to flat GDP growth and an anemic jobs market as factors that could undermine the domestic economy.
Over the past three quarters, France has posted quarterly growth figures of 0.0%, -0.1%, and 0.2%. Meanwhile, we’ve seen job losses of approximately 22,400 and 50,400 in 2nd and 3rd quarter, respectively. Sacre bleu!
In order to bust France out of its slump, President Hollande has divulged plans of a program that would shift about 20 billion EUR from income taxes to consumer tax. This would effectively make French tax collection rely more on consumption rather than taking directly from a person’s income.However, Moody’s remains unimpressed with Hollande’s government, as they’ve noted that the French government hasn’t actually been adept in implementing proposed measures over the past twenty years.
Not surprisingly, EUR/USD plunged at the release of Moody’s report. The pair dropped by 40 pips in the first 30 minutes before it steadied at the previous session’s support.
Considering that this happened in the late New York session, 40 pips is quite a lot!
What’s surprising market geeks though, is that EUR/USD seems to be recovering from its reaction to the downgrade. The pair is now comfortably trading near its price before the release of the report. This is probably because traders are realizing that this is basically old news and that it was inevitable that other credit rating agencies would turn sour on France.
We shouldn’t shrug off Moody’s downgrade though. Even though the agency’s call didn’t leave a lasting impact on EUR/USD, it still reminds us that there are concerns in the euro zone beyond Greece and Spain.
Keep in mind that Germany and France, the main drivers of growth in the region, have also been showing signs of weaknesses. Once the markets get over the drama of Greece possibly defaulting, it would be easy to shift its focus on the possible slowdown in growth and the deep recessions it could cause for the peripheral economies.
Over the next couple of weeks, we should keep an eye out for more updates from Germany and France. More weaknesses could inspire risk aversion and more credit rating downgrades, which could weigh significantly on the euro.