The rating agency announced that it was maintaining the French rating at Aa2 on Friday October 25, while deeming it “unlikely” that the government would succeed in reducing the deficit to 5%.
This is – again – a warning to France, even if the damage is limited. The American rating agency Moody’s, like Fitch a fortnight ago, decided to maintain France’s rating at Aa2 but with a “negative outlook”instead of «stable» so far. In other words, Moody’s is considering a future downgrade of the French debt rating. Right at the moment when one of the most fragile governments that France has ever known is looking for 60 billion euros to reduce the deficit and absorb a colossal debt of more than 3,200 billion. Moody’s poor assessment risks increasing the rates at which France refinances by issuing bonds on international markets.
The announcement of Moody’s rating came in the middle of the budget review session in the Assembly. The Budget Minister immediately used it to defend his policy. “France’s rating is on negative outlook because we need structural reforms. We will not solve the problems of public finances if we do not resolve the balance of social production in our country, starting with pension reform. launched Laurent Saint-Martin. «The pension deficit is 3%”, retorted LFI deputy Eric Coquerel. “The deficit you have created is due to tax gifts done to the richest.”
A 5% deficit “unlikely”
For Moody’s, this negative outlook reflects the fact that the agency judges “unlikely” that the government succeeds in reducing the deficit to 5% of GDP, given the scale of the necessary budgetary effort. “The fiscal deterioration we have already seen exceeds our expectations and contrasts with that of governments of countries with a similar score, which tend to consolidate their public finances in the current context. The agency also notes “a political and institutional environment not conducive to a coalition around political measures likely to sustainably improve the budget balance” and one “weaker budgetary management” than expected.
Fitch had already decided on October 11 to maintain France’s rating at “AA-” by placing it below E“negative perspective”, against «perspective stable» previously. We still have to wait for the rating from the third major global rating agency, Standard & Poor’s, next month.
French debt continues to appeal to investors, but its interest rates have now risen and reached those of countries like Portugal or Spain, known to be more risky. “We are today, in Europe, one of the most isolated countries in terms of deficit and debt,” et “our European partners are watching us”, admitted Tuesday the Minister of Economy and Finance Antoine Armand, on the channel TF1. It is to begin to restore the trajectory of public finances that the government has been defending a austerity budget in Parliament this week, which shows 60 billion euros in savings, including 40 billion in spending cuts and 20 billion in increases. taxes.
A note that has little impact on interest rates
The debt burden is today the second largest budget item behind education with more than 50 billion euros and it could become the first by 2027. This further reduces the financial room for maneuver. According to economist Eric Dor, “often the impact of a downgrade is insignificant because investors in the markets were already aware of the problems of the country concerned and were already taking them into account when determining the interest rate charged on its bonds”.
To preserve France’s credibility, the government wants in 2025 to reduce public spending, of which it is the champion in Europe, and increase taxes on businesses and wealthy taxpayers. However, he is struggling to convince a fragmented National Assembly, where he is in the minority. France’s strengths (diversified economy, solid tax and banking systems in particular) “risk being insufficient” facing difficulty “to obtain a majority to vote for the measures necessary for the consolidation of public finances”underlines Eric Dor.
The government intends to reduce the public deficit from 6.1% of GDP in 2024 to 5% in 2025 to return to European standards in 2029, with 2.8%. It forecasts that growth would reach 1.1% in 2025 as this year, penalized by recovery measures and that public debt would continue to swell to approach 115% of GDP, almost double the maximum set at 60% by Brussels.
The International Monetary Fund (IMF) warned on Wednesday against a risk of significant slippage without additional efforts: the deficit would then reach 5.9% next year and would remain at this level in 2029, with debt peaking at 124.1% of the GDP at this horizon. The S&P agency must make its decision on November 29. Last May, it had already lowered the French rating from “AA” to “AA-”.
Source: www.liberation.fr
