Should France still be Triple A?

During the recent negotiations in Brussels around the European sovereign credit crisis, the French President Nicolas Sarkozy was heard whispering to one of his advisors: “If we loose our Triple A, I'm dead...”. Politically speaking that is to say.

When I read that story, I actually wondered how come it's not already done by now. And here, I am obviously talking about the Triple AAA rating that France has managed to keep so far, even though I am not exactly one of Sarkozy's fans.

Indeed, it intuitively sounded to me like the data that could be gathered around France, both on a stand alone basis and on a comparative basis, would not be shiny. But I had to confess that I had never checked for myself in details. So to be as fair as possible, I decided to give it a go. And here is the outcome.

Zooming on France itself, the main macro-economic benchmarks and public budget data which can be extracted from the IMF and OECD public databases speak for themselves. Indeed it appears that between 2007 and 2010:

→ The average annual GDP growth was as low as 0.77%;

→ The public debt increased from 2.70% of the GDP to 7.00% of the GDP;

→ The public deficit increased as well, from 64.22% of the GDP to 82.33% of the GDP;

→ The average unemployment rate hit 8.87%.

Looks pretty bad for a Triple A nation...

Now, one could argue that during that period, the whole world underwent a massive financial crisis which heavily impacted all major economies. And that is indeed true. Hence the necessity to conduct a comparative analysis to check how well or bad France has actually managed the crisis versus other big players, including also being Triple A.

To do so, I got hold of the annual GDP growths, the public debt levels and unemployment rates of all 17 Euro zone countries for years 2007 to 2012 (IMF data, using their economic analysis department forecasts for 2011 and 2012). Then, I ranked these countries by averaging their “performances” on these indicators (using equal weights for all 3), and added their current S&P sovereign ratings next to the output. Finally, for benchmarking reasons, I computed the same elements on the G7 countries which are not part of the Euro zone, and on the BRIC countries (minus the ranking).

The indicators selection and the computing method are of course not perfect, but sufficiently representative for a high level analysis, and they give a good sense of who stands where. They use very significant indexes which truly reflect the health of an economy and the quality of public budget management, and project those in 2012, just like rating agencies do when assessing sovereign ratings. And as a matter of fact, the figure below confirms that France is not doing so well:

 

In brief, France end ups ranked number 12, with averages of 0.64% for the GDP growth, 78.32% of the GDP for the public debt and 9.03% for the unemployment rate. All other AAA countries of the Euro zone have better ranking, and even countries like Cyprus with a BBB rating come on top of France. And looking down at the BRIC countries which all have poorer ratings than France,well...

To close the loop, I ran a similar analysis on all Euro zone, G7 and BRIC countries which hold a Triple AAA rating today. There 8 of them. And ranking them, France comes last:

In conclusion, I don't hold a crystal ball, but it may get tough for France to hold on to its platinum rating. And if a downgrade does happen, one of the two Euro zone leaders will be hit. May get a bit shaky then, and not only for the French President...

Cheers,

Olivier