reforms, but he noted that even after the S&P downgrade French debt has enjoyed record low yields. He also said the government was committed to meeting its target of cutting the public debt to 3 percent of economic output next year from an estimated 4.5 percent this year.
"There is probably more downside until the knee jerk reaction is out of the way. But on the whole it seems likely that this more reflects an existing reality than new information for the market," said Steven Englander, global head of G10 FX strategy at Citi.
Moody's had been waiting to examine Hollande's 2013 budget and his response to a review of industrial competitiveness before adjusting its view on France as a sovereign borrower.Standard & Poor's has rated France AA-plus, with a negative outlook, since downgrading it by one notch in January. Fitch Ratings still has France at AAA, also with a negative outlook. The loss of its AAA rating from two agencies poses a problem for France, as investment funds often require their best assets to have at least two top notch ratings to remain in their portfolios.
Any rise in borrowing costs will be painful as the French government is already battling to rein in its deficit with potentially painful cuts to public spending."France is paying the price for not engaging in reform," said
Axel Merk, president of Merk Investments in Palo Alto, California, saying he was not surprised by the downgrade. With France's 2 trillion euro economy teetering on the brink
of recession, Hollande surprised many this month by unveiling measures to spur industrial competitiveness, chief among them the granting of 20 billion euros in annual tax relief to companies, equivalent to a 6 percent cut in labour costs.
The government had already announced 30 billion euros in budget savings next year in an effort to meet its deficit goal and is working on reforms to labour laws to enable companies to hire and fire more easily with economic swings.