S&P Holds French Rating, Praises Reforms, Doubts Targets

Rating agency Standard and Poor's on Friday maintained its rating for France at "AA" with a stable outlook, welcoming a raft of new reforms but warning that targets were unduly optimistic.

"In our view, the French government has shifted toward policies to reduce labor costs and corporate taxation in order to improve the economy's competitiveness," S&P said in a statement.

The agency said it thought the government would manage to reduce the public budget deficit to less than 3.0 percent of annual gross domestic product by the end of 2017, but that debt would remain high and would grow up to 2017.

The date estimated by S&P for achieving the 3.0-percent deficit limit is two years later than the deadline of 2015, already delayed by two years, set by the European Commission

In early trading on Friday, the yield, or interest rate, on 10-year French bonds eased slightly to 1.997 percent from 2.009 percent late on Thursday.

On Wednesday, the new French Socialist Prime Minister Manuel Valls laid out a switch of economic policy with a program of measures to reduce the public deficit to the EU ceiling of 3.0 percent of output, saying that France was sticking to the EU deadline for this at the end of next year.

This 2015 target date was significant because in the preceding days French President Francois Hollande had indicated that under the new drive for reforms, France would angle to get extra leeway from the EU on the deficit timetable.

Valls, in his statement on Wednesday, also outlined a range of cuts to planned public spending to sit alongside a program to cut taxes on companies to raise competitiveness, exports and growth and reduce record unemployment.

This new policy direction to boost business and hold down the growth of public spending has raised strong opposition on the left of the Socialist Party.

- Risks 'balanced' -

S&P said that in holding its stable outlook for the Frech economy, it took the view that "risks to France's creditworthiness are balanced and that there is less than a one-in-three probability of raising or lowering the ratings over the next two years."

Among its strong points, France had high personal incomes and productivity, was strongly diversified and had a strong birth rate, a stable financial sector, strong savings rates and a well-educated workforce.

It also benefited from political stability and "as a core member of the eurozone, France also benefits from significant monetary flexibility," S&P said.

This comment appears to contradict the line taken by the French government that French exports are suffering because the euro is unduly strong.

The agency said it expected the French economy to grow by an average of 1.3 percent per year from 2014 to 12017 and that exports would pick-up, pulled by demand elsewhere in the eurozone.

S&P praised reforms announced this year but warned that the short-term effects on economic growth were "uncertain".

It said that "the government appears to be advancing on structural reforms to improve business conditions" but it remained to be seen whether these efforts would be "sufficient to improve the economy's cost competitiveness" and they might not be enough to "fuel employment growth".