S&P cuts France’s credit rating on deficit overshoot

Standard & Poor’s cut its rating on France’s sovereign debt on Friday (31 May), delivering a painful rebuke of the government’s handling of the strained budget days before an EU parliamentary election.

S&P cut the country’s long-term sovereign debt rating to “AA-” from “AA”, citing expectations that higher-than-expected deficits would push up debt in the euro zone’s second-biggest economy.

The downgrade makes S&P the second of the three big ratings agencies to lower its view on French debt in little more than a year, after Fitch cut its rating to AA- in April 2023.

The latest downgrade is bad news for French President Emmanuel Macron as his government struggles to cut the far right’s considerable poll lead ahead of European Union parliamentary elections on 9 June.

“The downgrade reflects our projection that, contrary to our previous expectations, France’s general government debt as a share of GDP will increase as a result of larger-than-expected budget deficits over 2023-2027,” S&P said in a statement.

The threat of a downgrade has loomed large since the government had to sharply revise higher its budget deficit estimates in April because 2023 tax revenue came in weaker than expected.

The government now expects to cut its public sector budget deficit from 5.1% of economic output this year to 4.1% next year with the aim of reducing the fiscal shortfall to an EU ceiling of 3% by 2027.

But those estimates hinge on tens of billions of euros in budget savings being carried out, which institutions from the International Monetary Fund to the national fiscal watchdog have said need to be detailed if they are to be credible.

S&P said that though it expected an economic pick-up and recent reforms would help reduce the deficit, it nonetheless expected the fiscal shortfall to stay above 3% in 2027.

Finance Minister Bruno Le Maire said the downgrade would not weaken his resolve to improve France’s public finances, blaming the fiscal deterioration on the cost of the COVID-19 pandemic crisis.

“Our debt easily finds takers on the markets. France remains high quality (debt), among the best in the world,” he said in an interview with Le Parisien newspaper.

Citigroup analysts said in a note that a downgrade would have minimal impact on France’s borrowing costs, possibly adding only 3-5 basis points to the spread on French benchmark bonds over their German equivalents.

The political fallout of the downgrade is likely to be more painful, giving opposition parties fodder to attack the government, which had enjoyed a strong economic track record until the deficit overshoot earlier this year.

“We believe political fragmentation adds to uncertainty regarding the government’s ability to continue implementing policies that increase economic growth potential and address budgetary imbalances,” S&P said.

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