Moody's Says France Will Likely Miss Deficit Target

PARIS--France will likely miss its deficit reduction targets due to weaker-than-hoped economic growth and risks the government will fail to implement spending cuts fully, Moody's Investors Service said Monday.

The ratings firm said in a statement that there are "significant implementation risks' to France's plan to reduce spending by 50 billion euro ($67.1 billion) over three years because many of the measures still haven't been defined.

Moody's also noted there is a challenging political environment--around 40 of President François Hollande's own Socialist majority abstained from voting on the spending cut plan in the Spring--and said growth is weaker than expected.

"While the deficit will remain on a declining trend, the country is likely to miss its fiscal targets in 2014 and 2015," Moody's said in a statement. France aims to bring the deficit down to 3.8% of economic output this year and 3% next year from 4.3% in 2013.

The caution from Moody's underscores concerns that the euro zone's second largest economy will fail to pick up strongly enough this year to cut off a rise in unemployment and help the government rein in the deficit as planned.

Even Mr. Hollande's government warned in recent days that the economy is doing worse than expected, and ministers will face a challenging period when they return to work later in August.

In remarks published earlier Monday in French daily Le Monde, the French president called on Germany to do more to invest and drive European growth and said the European Central Bank must take measures to inject liquidity into the economy as there is a "real deflation risk."

France publishes its second-quarter economic growth figures Aug. 13, at which point the government will have a clearer picture of whether it can meet its targets this year.

Moody's said current government forecasts are already too optimistic. The firm cut its growth forecasts to 0.6% this year and 1.3% next year, from 1% and 1.5% previously.

The comments in Monday's statement didn't constitute a rating action from Moody's, which affirmed its Aa1 rating for France in January. But Moody's noted it has a negative outlook on France's Aa1 rating as the country's fiscal performance is weaker than countries with the same rating and "significantly weaker" than top-rated triple-A countries.

Write to William Horobin at [e-mail]

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