French turkey au sauce Hollandaise

As I was expecting, Moody’s did not raise Turkey’s credit rating to investment grade in its annual review released a day before its credit risk conference in Istanbul on Nov. 21.

I have always argued that while an upgrade is a possibility in 2013, it would be too optimistic to expect one this year, but some analysts were nevertheless hopeful. However, the interesting Moody’s rating decision of the week was not about Turkey: while Americans were getting ready for their annual Thanksgiving turkey dinner, the agency stuffed France by stripping the country of its triple-A rating on Monday.

Developments up to the downgrade should have delighted conspiracy theorists: Several investment banks published negative reports on the country’s economy last week. Then, The Economist featured France’s woes on its cover last Friday, arguing that the country was “the time time-bomb at the heart of Europe,” which could become the biggest danger to the euro.

In its note announcing the decision, Moody’s argued that it cut France’s rating based on three interrelated factors. The first is the country’s market rigidities and lack of competitiveness. These are indeed important issues, but they did not suddenly appear overnight. In fact, anyone who has lived in France for more than a couple of weeks ends up being fed up with everyday nuisances. Besides, I am très étonné that this factor was mentioned a week after a major pact on competitiveness was announced. Moody’s declares that France has a poor track record of implementing such measures, but some of the reforms, such as the corporate tax credits offset by value-added tax hikes set for 2014, are too specific to back down from.

A second factor is that “the predictability of France’s resilience to future euro area shocks is diminishing.” Moody’s argues that French banks are dangerously exposed to peripheral Europe, especially Italy. But Moody’s put France’s rating under review on July 23. Since then, the probability of a crisis emanating from Italy has fallen considerably thanks to the European Central Bank’s more determined stance.

The agency’s third factor is that “France’s fiscal outlook is uncertain, as a result of its deteriorating economic prospects.” While I am no expert on the French economy, its budget and debt figures are worrying. Indeed, French economists don’t find the country’s fiscal targets and growth forecasts very realistic.

As The Economist details in its 14-page special report, France does have serious problems that need to be addressed right now. It all boils down to whether President François Hollande will be able to undertake the necessary reforms, or whether investors will be eating a Gallic turkey, or rather rooster, au sauce Hollandaise next Thanksgiving.



But I am not sure that a ratings cut right now can be justified. Markets seem to agree with me, as French government bonds barely reacted to the downgrade. Perhaps it is not just the Turks who are growing increasingly skeptical of the rating agencies.