MOODY'S credit rating agency has stripped France of its coveted AAA rating and declared that the country's economic outlook remains ''negative''.
In what will be a severe blow to Socialist President Francois Hollande, the agency said it was reducing the country's rating from AAA to AA1, claiming France's ability for economic growth was being hampered by ''structural challenges'' including its lack of competitiveness, high unemployment, public debt and market rigidity.
It said it was not confident Mr Hollande's government could - or would - introduce the necessary structural reforms and spending cuts to improve its rating in the medium term and expressed concern over France's exposure to risks from ailing eurozone countries.
Moody's decision follows Standard & Poor's downgrading of France's rating a notch in January.
It came as France was reeling from a damning article in The Economist titled ''The time-bomb at the heart of Europe''. The special report warned that the parlous state of the French economy, its rising unemployment, lack of competitiveness, dwindling industry and high public spending, could overshadow the problems of Greece or Spain and sparked angry reactions from French ministers.
Defending the downgrade, Moody's stated: ''France's long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and long-standing rigidities of its labour, goods and service markets.
''France's fiscal outlook is uncertain as a result of its deteriorating economic prospects, both in the short term, due to subdued domestic and external demand, and in the longer term, due to the structural rigidities noted above.''
The agency expressed concern over France's exposure to other beleaguered eurozone economies through its trade and banking links.
Moody's said it was unlikely to upgrade France's rating in the medium term but would consider changing the outlook from negative to stable if the government implemented economic reforms and tax measures that ''effectively strengthen the growth prospects of the French economy and the government's balance sheet'' and reverse the ''upward trajectory in public debt''.
It recognised that Mr Hollande has pledged reforms but stated the proposed measures were ''unlikely to be sufficiently far-reaching to restore competitiveness''. ''Moody's notes that the track record of successive French governments in effecting such measures over the past two decades has been poor,'' it said.
The Socialist government's strategy rests on forecasts that growth will reach 0.8 per cent next year and in bringing unemployment - at present at a 13-year high - down.
France's finance minister, Pierre Moscovici, said the downgrade was a ''sanction for past management'' of the country, intended to incite the government, elected in May, to carry out reforms rapidly. He said cutting debt was a priority. ''The debt is an enemy.''