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Downgrade Not Worst of France's Problems: Analysts


Worries about France’s economic and political problems are continuing following Friday’s high-profile downgrade of its credit rating by Standard & Poor’s.

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“France is probably the most retarded country in Europe in considering the fact that its social model is broken,” David Roche, President & Global Strategist, Independent Strategy, told CNBC Monday.

“Unless they plan a new relationship between the people and the government then France is probably the most dangerous country [in Europe].”

A crisis in the euro zone’s second-largest economy, which is expected to hit a debt-to-gross domestic product ratio of 90 percent this year and is heavily exposed to troubled Italian banks, would be more critical than in the peripheral states.

On Friday, Standard & Poor’s downgraded the credit ratings of France, Italy and seven other European countries,renewing concerns about the impact of the euro zone debt crisis on France.

The CAC 40, slid Monday morning following the downgrade.

There is also political uncertainty in France, with right wing President Nicolas Sarkozy facing an election later this year. His main contender, Socialist Francois Hollande, promised on Sunday to reduce the "dominance of finance" if elected.

S&P Downgrade and the Banking Sector

Meanwhile, Sarkozy is trying to push through measures that will reduce the social welfare bill companies have to pay for their employees. He hopes to use an increased sales tax to help fund the country’s welfare bill.

Moritz Kraemer, S&P's managing director of European sovereign ratings, defended the ratings agency's decision and warned of the danger of another downgrade of France in an interview with CNBC.

“Sitting with relatively high budget deficit and debt stock, France is much more vulnerable to a downturn than, for example, Germany,” he said.

“If another French downgrade were to be happen, and that is not a foregone conclusion at all, it would most likely be triggered by further erosion of the fiscal consolidation strategy and…the downside scenario of a euro zone recession.”

Andrew Sentance, a former member of the Bank of England’s Monetary Policy Committee and Senior Economic Adviser to PwC, told CNBC that markets will adjust quickly to Friday’s downgrades, but that “fundamental issues” with the euro zone will continue to cause problems.

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