Sovereign debt

Posted by on Nov 26, 2012 in Commentary, Market News, News

Sovereign debt

So Moody’s took the decision to downgrade the sovereign debt ratings for France last week. This is the second ratings agency to strip France of it’s AAA rating, following the decision by Standard & Poors in January. That just leaves Fitch of the major ratings agencies having France with a AAA rating.

One of the reasons cited was the level of debt as a percentage of GDP (Gross Domestic Product), which for France, is estimated at 90%. France has made several budget moves in an effort to get current year borrowing down to 3% of GDP for 2013, in line with the requirements of the Maastricht treaty.

There are other reasons for the downgrade, including the continued reduction in competitiveness of the French economy. There are some interesting comparisons to be made to the UK economy.

OK, in the UK we have our own currency and can set our own monetary policy. UK debt is lower than that of France when expressed as a percentage of GDP. But worryingly, there is no prospect of the UK getting it’s current budget deficit down to 3% of GDP in 2013.

That means if France succeeds in sticking to it’s budget, it’s overall debt levels will be increasing at a slower rate than those of the UK. And while the UK has a way to go before it reaches 90% borrowing levels, adding to debt at the current rate of 8% per annum is unsustainable.

Put simply, we are living way beyond our means. George Osborne has not really cut the debt as much as he could or should have so far. France is under the spotlight right now. Next week, it will be the UK’s turn.