Moody's Affirms France's Credit Rating

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Moody's Investors Service on Friday affirmed France's credit rating while maintaining its negative outlook.

The ratings firm, which rates France Aa1, said it kept the negative outlook due to continuing reduced competitiveness in the nation's economy, as well as the risk of further deterioration in the financial strength of the government.

"Although the French government has introduced or announced a number of measures intended to address these competitiveness and growth issues, the implementation and efficacy of these policy initiatives are complicated by the persistence of long-standing rigidities in labor, goods and services markets as well as the social and political tensions the government is facing," Moody's said.

The affirmation comes at an awkward moment for President Francois Hollande after he promised to tackle France's high level of public spending and cut labor taxes to help the country's struggling companies. International institutions, European leaders and domestic political opponents had welcomed socialist President's proposal of the so-called " responsibility pact" with business.

Mr. Hollande has pledged to relieve companies of the equivalent of EUR30 billion in family welfare taxes, but the net tax cut may include an already existing tax credit and be closer to EUR10 billion. And with EUR50 billion of spending between 2015 and 2017 cuts already pledged to reducing the budget deficit, it is not clear where extra savings will come from.

Moody's said details of how the plan will boost employment while cutting spending were still lacking. "Therefore, it is difficult to assess at this time the likelihood that the plan will achieve its stated goals," the firm said.

"France's fiscal policy flexibility is limited, which, together with the policy challenges noted above, imply a continued risk of missing fiscal targets," the firm added.

The French government's official growth forecasts are more optimistic: 0.9% in 2014, 1.7% in 2015 and 2% a year thereafter. Ministers have even said that Mr. Hollande's pro-business initiative could push growth above 1% this year and higher than official forecasts in the following years.

Paris is also confident it can meet its deficit forecasts, despite recently acknowledging that the central state's 2013 budget deficit was higher than expected as tax receipts came in lower than hoped. Mr. Hollande's government had already slipped from its original plan to get the total deficit--which includes local authorities and social security-- below 3% of economic output last year. That target now won't be met until 2015, the government says.

Looking ahead, Moody's said Friday it would likely issue a downgrade if its confidence in the likelihood of government reforms declined. Yet, if the changes are implemented and effective, the firm said it would consider moving the outlook to stable and eventually bumping up the rating.

Write to William Horobin at william.horobin@wsj.com and Michael Calia at michael.calia@wsj.com

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