France said its economy was sound and reforms were on track after credit ratings agency Moody's stripped it of the prized triple-A badge due to an uncertain fiscal and economic outlook.
Monday's downgrade, which follows a cut by Standard & Poor's in January, was expected but is a blow to Socialist President Francois Hollande as he tries to fix France's finances and revive the euro zone's second largest economy.
"The rating change does not call into question the economic fundamentals of our country, the efforts undertaken by the government or our creditworthiness," Finance Minister Pierre Moscovici told a news conference on Tuesday.
The downgrade to Aa1 with a negative outlook sent the euro 0.30 percent lower to 1.2770 against the dollar late on Monday but the currency recovered some ground to trade at 1.2795 early on Tuesday.
Wider market reaction was also limited with futures on French OAT government bonds down 0.25 pct and French CAC stock futures down 0.22 pct, in line with German DAX futures which fell 0.25 percent.
The benchmark French 10-year government bond yield was barely changed at 2.09 percent versus 2.08 percent before the downgrade. "This was priced in, really. The market has been expecting it for more than a year now. It might have an impact on the short term, but it won't last. All in all, CAC 40 companies are big multinationals, they won't be impacted by this," said David Thebault, head of quantitative sales trading at Global Equities.
France, a core member of the euro zone, has been borrowing at historic low levels of around 2 percent for long-term bonds as investors consider it a safe haven from the turbulence in southern countries such as Greece and Spain.Yet Moody's said it was keeping a negative outlook on France due to structural challenges and a "sustained loss of competitiveness" in the country, where business leaders blame high labour charges for flagging exports.
"The first driver underlying Moody's one-notch downgrade of France's sovereign rating is the risk to economic growth, and therefore to the government's finances, posed by the country's persistent structural economic challenges," Moody's said.
"These include the rigidities in labour and services markets, and low levels of innovation, which continue to drive France's gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base." Moscovici told Reuters late on Monday the downgrade was a motivation for the 6- month-old Socialist government to pursue