France's credit rating cops downgrade

Ratings agency Fitch cut France's credit grade by one notch to "AA" on Friday, saying Paris's efforts to trim its fiscal deficit have fallen short to avoid a downgrade.

The Euro plummets to a 17-month low against the US dollar on news that France's credit rating might be downgraded by Standard & Poor's. (AP)

"The weak outlook for the French economy impairs the prospects for fiscal consolidation and stabilizing the public debt ratio," Fitch said.

The AA grade - two steps below the top triple-A rating - was decided despite France having reduced its projected deficit for fiscal 2015 to 4.1 percent of GDP, down from 4.3 percent, under pressure from the European Commission.

"On its own, this will not be sufficient to significantly change Fitch's projections of France's government debt dynamics," the agency said.

"The 2015 budget involves a significant slippage against prior budget deficit targets."

It noted that the draft 2015 budget projected government debt to GDP ratio will peak at 98 percent in 2016, higher and later than previous projections.

But Fitch doubted those targets could be met.

"Even under the official forecast, the capacity of the public finances to absorb shocks has been significantly reduced," it said.

"Fitch expects the debt to GDP ratio to peak higher at close to 100 percent of GDP, with a slower decline to 94.9 percent of GDP by the end of the decade."

The agency said the outlook for the rating was stable, envisaging no downgrade (or upgrade) in the next several months.

But it said its own fiscal projections for the eurozone's second largest economy risk being overoptimistic in part "owing to the uncertain outlook for GDP growth and inflation in the near term."

Secondly, it cited "increased uncertainty over the government's ability to deliver on a fiscal consolidation path."

"Reflecting these concerns, Fitch's medium-term growth forecasts are somewhat weaker and budget deficits wider than official projections," the agency added.

French Finance Minister Michel Sapin said in response to the downgrade that the government was narrowing its budget gap while supporting growth.

"In a difficult economic environment in Europe, the government is sticking to its path... pursuing the reforms necessary to strengthen growth and make businesses more competitive," he said in a statement.

"The policy has begun to produce results, with companies benefiting from the initial effects of tax reductions, which will continue in the coming years."