Allez Les Bleus!

By Eoin Fahy, Friday, 12th August 2011 | 0 comments

Despite rumours to the contrary, it's extremely unlikely that France is about to lose its AAA credit rating.  While the US did lose its AAA rating last week, its finances are considerably poorer, as I outline in brief below.

Arguably the single most-important measure of a government's debt situation is the debt to GDP ratio.  For France, that is estimated at 85% this year.  The US number is substantially higher, at about 98%.  For comparison, Ireland's ratio is estimated to reach 111% by the end of this year.

It's also important to look at deficits, of course.  While the debt ratio mentioned above measures the total stock of debt accumulated over the years, the deficit measures, more or less, the pace at which that debt is rising due to an excess of spending over income.  Using European Commission estimates, the US has a deficit this year of around 10% of GDP, while France has a deficit of 5.8%.  Again for comparison, Ireland's deficit will be around 10% this year, roughly the same as the US.

Economic growth is of course a very important influence on the ability to repay debt.  Here the two countries are roughly equal, at least according to consenus forecasts for this year.  France is expected to grow by 1.9%, and the US by 1.8% - not much difference there, obviously.

So far I have looked only at 2011 numbers, but it's also important to look forward, taking account of where the government deficits are expected to go in the years ahead.  Here again, using IMF forecasts, France compares well, as the table below shows.  In each year, France is expected to have a substantially lower deficit than the US.

Deficit Projections (IMF)
  2011 2012 2013 2014
France -5.7 -4.8 -3.8 -2.9
US -9.3 -7.6 -5.6 -4.7






These are all forecasts, of course, and might turn out to be wrong. Nonetheless this helps to explain whey all three credit ratings agencies have flatly denied that they are even considering downgrading France despite rumours to the contrary. 

The markets have lots of things to - legitimately - worry about.  But an imminent downgrade of France does not appear to be one of them.


Note: Data above sourced from the IMF and CSFB.

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