London, 17 November 2009 -- The policy of large-scale debt-funded public investment recently outlined by French President Nicolas Sarkozy does not pose a threat to France's Aaa sovereign rating, says Moody's Investors Service in a new Special Comment entitled "France's Grand Emprunt: A short-term cost for an uncertain long-term gain." While the details are still to be finalized, Moody's believes that the scheme, believed to amount to around EUR 35 billion, will only marginally weaken France's position in the Aaa rating category over the short term, with a possible but very uncertain upside over the long term.
The aim of France's new policy of public investment -- known as the "grand emprunt" (extraordinary borrowing to fund investment) -- is to generate higher growth and tax revenues, and therefore an eventual improvement in the government's debt metrics. The French President outlined the proposed plan in a speech to the country's parliament in June 2009, during which he rejected the concept of a policy of austerity as a means of resolving France's public debt and deficit problems.
"France has a relatively large debt burden, high deficits, a well-developed infrastructure and a history of unsuccessful attempts to 'grow' out of its debt. Consequently, Moody's believes that the odds are stacked against the proposed borrowing plan making a positive contribution to the long-term creditworthiness of the French government," says Arnaud Marès, Senior Vice President in Moody's Sovereign Risk group and author of the report.
Moody's new report explains that the size of the envisaged scheme is, on its own, too small to represent a genuine threat to France's rating (a resistant Aaa). Indeed, Moody's understands that the French government will put EUR13 billion towards the scheme, representing the amount the government has received from its banks in repayment of the special funds that were extended to them at the height of the crisis. This means that France's net borrowing will actually be less than EUR35 billion. Nevertheless, the rating agency says the scheme will increase public debt and increase the vulnerability of public finances to a rise in global long-term interest rates.
"As a result of the proposed scheme, France will most likely lose some altitude within the Aaa space," says Pierre Cailleteau, Managing Director of Moody's Sovereign Risk Group and Moody's International Chief Economist.
Moody's concludes that the grand emprunt is unlikely to constitute a credible substitute for fiscal retrenchment. "The scheme can -- at best -- complement such a retrenchment," explains Mr. Marès. Moody's understands that the French government's proposed borrowing plan is not intended to remove the need for a contraction of the structural deficit.
The new Special Comment presents Moody's analytical framework for assessing the relative merits of 'investment boost' versus 'budget cuts' as a means of post-crisis reparation of government balance sheets.
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