France Dodges a Second Downgrade as Macron Plans to Slash Debt

William Horobin
·3 min read
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(Bloomberg) -- France dodged a second downgrade by a major ratings firm this year, giving President Emmanuel Macron some reprieve as he seeks to convince investors he can contain a debt burden bloated by years of crisis spending.

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S&P Global Ratings restated its AA credit rating for the country, saying its wealthy economy and strong institutions underpin its creditworthiness. The outlook on the rating is sill negative.

“The negative outlook reflects our view of downside risks to our forecast for France’s public finances amid its already elevated general government debt,” analysts from the ratings firm said. “We could lower our sovereign ratings on France within the next 18 months if general government debt as a share of GDP does not steadily decline over 2023-2025 or if general government interest expenditure increases above 5% of revenue.”

The decision is a source of relief for Macron after Fitch Ratings cut France at the end of April and Scope Ratings put a negative outlook on its assessment last week. French people are also concerned about the trend, with 70% worried about Fitch’s decision, according to a poll of 1,001 adults by Elabe for Les Echos newspaper this week. The same survey shows 76% consider it urgent to reduce public debt.

The government is trying to prevent a shifting view on France that would cast a shadow over Macron’s efforts since 2017 to build a reputation for careful management of public finances combined with overhauls of labor rules and taxation to support economic growth.

But he has also opted for huge spending in response to successive crises, from the Yellow Vests to the Covid pandemic and the surge in energy prices. Rising interest rates as the European Central Bank seeks to damp record inflation will add to the burden, driving debt servicing costs up by more than 50% to €70 billion ($75.3 billion) a year by 2027, according to the government’s own forecasts.

S&P revised downward its budget deficit forecast over 2023-2025 to 4.6% of GDP from 4.9% previously, and now expect the deficit in 2026 to be 3.8%. This is mainly due the government’s revised budgetary consolidation strategy, S&P said. “We project gross general government debt will remain above 110% of GDP with a persistent, albeit declining primary budget deficit.”

Ratings firms have also flagged growing political headwinds that could stifle Macron’s capacity to continue unpopular overhauls he says are necessary to boost economic growth that could bring down debt ratios. S&P said the lack of an absolute majority in the French Parliament since mid-2022 could complicate policy implementation.

While the pension reform enacted earlier this year should support government finances, the mass protests and parliamentary battles over the change could make it harder for Macron to build parliamentary majorities for future legislation.

Finance Minister Bruno Le Maire said S&P’s decision is a “positive signal” for France. “More than ever, our ambition is to accelerate debt reduction in France,” he told French JDD newspaper.

Le Maire said the government would continue to drive difficult and necessary reforms such as the recent pension reform. He also said a conference on public spending June 19 would identify “several billion euros” of additional savings.

France must stick to its strategy for debt and deficit reduction with total determination,” Le Maire said.

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