As they say, one man’s plight is another joy. Recently Moody downgraded France to Aa1, on concerns that the public deficit of 90% of GDP might slow growth considerably. My first reaction was – “What growth?”. In France, this is a long term discussion, yet there is no end in sight – neither is there a program for sustained growth in this country.
As a consequence, most French companies are now eying major cost reductions. It is well known that France lags behind the other major Eurozone economies in terms of productivity – the 35 hour workweek, together with the increased power of unions for sure cannot help here.
As said, this was good for shares. Global European Indices went up – “the FTSE Eurofirst 300, which had its biggest one-day gain for 10 weeks on Monday, recouped most of its early losses and was down 0.1 per cent at 1,089.71.” (quoted from Financial Times). This is only natural – if government bonds are not longer trustworthy, it means that money will flow to other investment vehicles, the most in hand being shares. Companies are also much more likely to reduce costs than the socialist Hollande government, which now faces more and more tough demands from both its electors and from the companies, all in suffering. And by the way, Moody’s threatened it can downgrade further France’s investment rating, if it fails to implement reforms.
I’m not sure that a sputtering France is all that good for long term stock prices. Companies need demand to increase revenue and earnings. If France and other Europeans continue their economic under-performance into the long-term, the real asset class winner will probably be U.S. Treasuries.
It will be interesting to see what reforms France is going to make to increase their competitiveness and productivity. At the moment it appears that they have been resorting to tax increases, in my opinion this is bad for France’s competitiveness.
My country, South Africa was downgraded too. Countries are in trouble at the moment…