Unlike Moody’s, S&P sees the glass of France’s finances as half full. Whereas Moody’s cut its Aaa rating to Aa1, S&P held its AA+/A-1+ rating, but with a negative outlook. Lost in the news was a previous cut of France by S&P, but at least S&P held new fire.

In its comments about France, S&P said:

The affirmation reflects our opinion that the French government remains committed to budgetary and structural reforms that would build on the measures it has proposed so far and improve the country’s growth potential. In particular, in the face of uncertain economic growth prospects, the government has already taken steps toward restoring competitiveness, by announcing the National Compact for Growth, Competitiveness and Employment this month, and toward compliance with its medium-term budgetary targets.

S&P also expects French gross domestic product to rise by 0.4% next year.

Moody’s rating rationale was more complex than S&P’s. S&P commented that France faced trouble with economic growth. S&P also pointed to “rigidities in labour and services markets, and low levels of innovation.” And that is at the heart of the different observations. Moody’s at least gave France the benefit of the doubt on labor reform and plans of the current government to change the atmosphere that affects France’s potential future growth.

The S&P opinion could apply to many of Europe’s economies, or even the United States. Ratings agencies have repeatedly marked two risks to almost all developed economies. One is pegged by deficits and debt. The other is pegged by whether government can foster growth against a business climate undermined by anxiety from the previous recession and worry about another.

S&P believes that government can take a role, through regulation and investment, to dig the private sector out of its funk. Several suggestions have been made about the tools that might be employed. More ready access to capital is among these. A tax code that encourages capital investment and job creation is another. And government programs that buy goods and services directly from the private sector is yet another.

S&P’s opinion is based, at least by half, on the chance that governments will come around to making decisions that not only attempt to cut deficits, but also support a soothing of the private sector.

Douglas A. McIntyre

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