Moody’s Investors Service has downgraded the long-term ratings of PSA Peugeot Citroen to Baa1 from A3 with a negative outlook.

Short-term ratings at the car maker remain unchanged at Prime-2. For 2007, Moody’s expects only a gradual improvement – towards the second half of the year – for the French carmaker.

Moody’s said that the negative outlook for PSA was due to the challenges it is facing, including the potential need to undertake further restructuring of its automotive business.

“PSA’s loss of market share in its core western European markets continued in 2006 and the company could not fully compensate [for] the profitability-impact of this weaker-than-expected volume development with internal efficiency improvements,” said Falk Frey, vice president, senior credit officer and Moody’s lead analyst for the European automotive sector.

Moody’s said that the launch of key models during 2007 and 2008 should allow PSA to regain some market share and improve its product mix to higher margin cars.

Furthermore, the analyst said, the reduction of its workforce and plant capacity in western Europe should result in a strengthened financial performance in 2008 and 2009.