Ratings agency S&P cuts France's outlook to negative from stable

France's issues 'homemade': S&P
France's issues 'homemade': S&P   

Ratings agency Standard & Poor's (S&P) cut its outlook for France to negative from stable on Friday, amid growing concerns about the strength of the country's economic recovery.

Still, S&P affirmed France's AA/A-1+ rating.

France has been dubbed the "sick man" of the euro zone over recent months, after economic data which have continued to surprise on the downside. Gross domestic product (GDP) failed to expand during the second quarter of this year after stalling in the first, and is expected to have grown only slightly—by 0.2 percent—in the third quarter, according to the Bank of France.

Eiffel Tower, Paris.
Lionet Bonaventure | AFP | Getty Images
Eiffel Tower, Paris.

"In our view, the French government's budgetary position is deteriorating in light of France's constrained nominal and real economic growth prospects," S&P wrote in its research update on the country released Friday.

S&P last downgraded France in November 2013, when it cut its sovereign credit rating to AA. Last month, rival credit agency Moody's said it was keeping its Aa1 rating (the agency's second highest) on French government debt, but maintained its negative outlook.

S&P pointed to France's high per capita income and skilled workforce in explaining the affirmation of an AA rating. But the outlook revision "reflects our view of receding fiscal space for the French government in light of the economy's constrained real and nominal growth prospects against the background of policy implementation risk," S&P wrote.

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France's finance minister, Michel Sapin, told CNBC as the S&P announcement came out that the change of outlook does not represent an issue with France, but is actually about the euro zone.

"Of course it is about France," Moritz Kraemer, who heads sovereign ratings for S&P, told CNBC in response to Sapin's comments. "We indeed think that the risks are increasingly tilted towards the downside, which has to do with a number of things. Some of them are home-made, others of them are indeed sort of a pan-European phenomenon."

Kraemer said S&P is "now quite doubtful" that France can hit its 3 percent 2017 deficit target.

Before the news, Sapin said France had been missing important structural reforms, but that those are now underway.

These reforms are important and broad, Kraemer said, but the country's outlook was changed in part because "the implementation risks are actually quite significant."

According to S&P, the outlook change signals that there is a "1-in-3 likelihood" that events would occur leading to a downgrade from the ratings agency.

S&P cuts France's outlook: Report
S&P cuts France's outlook: Report   

Budget controversy

France is also likely to face a chilly reception from its euro zone allies at the Eurogroup/Ecofin meetings of euro area finance ministers on Monday and Tuesday.

It now looks as though, under the terms of President Francois Hollande's budget, that France will not hit its 3 percent public-deficit-to-GDP target until 2017—a target previously agreed with its euro zone contemporaries. The European Union is expected to reject the country's draft budget at the end of this month and demand a new one, Reuters reported on Monday.

There has also been discontent over Hollande's economic reform program, which includes pledges to cut red tape and make French labor easier to hire.

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Figures published earlier Friday showed that industrial production in the country stagnated in August, and although this was slightly better than analyst expectations, it may not be enough to stop the euro zone's second-largest economy slipping back into recession.

Growth concerns weigh

Given the size of France, its fortunes are closely tied to that of the whole common-currency area. It comes as investors admit to being increasingly worried about Germany—the region's largest economy, once dubbed the "powerhouse of Europe"—after a string of disappointing manufacturing data for the country.

Fears of a slowdown in Europe have hit investor confidence across the world, resulting in equity market volatility in the U.S. and Asia over recent days.