In November, soon after France and Belgium were forced to pump another 5.5 billion euros into bailed out lender Dexia, the ratings agency Moody’s stripped France of its AAA sovereign debt rating. The interesting bit was that Moody’s maintained its negative outlook. The ratings agency reckons France has poor longer-term economic growth prospects and a poor fiscal outlook. According to recent data, the outlook is still just as dim, probably worse.
I would also add that France has a poorly capitalised banking system and a frothy housing market. In my view, it is not inconceivable that after a few more rounds of bailouts and austerity-enlarged deficits, France could be in the 120-130% government debt to GDP range that Italy is now in. And where Italy’s problems are related to demographics and high real effective exchange rates, making the country look like a less efficient Germany, France adds in the housing and banking problems that make it look more similar to Spain.
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