Thomson, co-manager on the Ignis Absolute Return Government Bond and Ignis International Global Government Bond funds, downplayed France’s recent ratings downgrade but highlighted the country’s economic weakness.
Last week, Moody’s Investors Service stripped France of its AAA status, changing the ratings on its government bonds from Aaa to Aa1. It also kept a negative outlook on the country, meaning another downgrade is not ruled out.
Thomson labelled the ratings agency’s move as “both inevitable and belated … but also largely irrelevant for financial markets”.
He claimed the difference between an AAA rating and the next level down is essentially meaningless and said financial markets do not tend to react until a country is downgraded to single A – which he does not see happening to France for at least another two years.
“Nevertheless, we maintain a small underweight in French government bonds,” the fund manager added. “This reflects the prospect for further deterioration in economic fundamentals as tighter fiscal policy drives the economy into recession during 2013.”
The French economy expanded by 0.2% in real terms over the third quarter of the year, after activity was buoyed by consumer spending, government spending and net exports. This was better than expected, although the drivers are likely to be temporary.
However, slow progress in the country’s structural reform has attracted criticism from commentators such as the International Monetary Fund (IMF) and Moody’s. Thomson predicted that the French economy will contract by 0.8% during 2013, owing in part to a lack of progress in reform.
“We view France as a very slow train wreck and fully agree with the IMF, OECD and rating agencies criticism of the slow pace of reform,” the economist commented.
“The slow implementation means the benefits will take a long time to be realised and reflects a government and electorate that are still resistant to substantial reform.”
