France is gearing up for a battle to prevent a potential downgrade of the country’s credit rating by Credit Rating Agency S&P Global as soon as today (verdict is expected around 11:00 pm Fr Time). Despite grappling with high debt and deficit levels, France is determined to prove its creditworthiness and commitment to financing the green transition. With a downgrade looming, Finance Minister Bruno Le Maire has been vocal about the country’s robust arguments for preserving its rating.
Concerns over Debt and Deficit
France faces the possibility of a downgrade from its current ‘AA-‘ rating due to its considerable debt levels, which stood at 111.6% of GDP in 2022, making it one of the highest in the European Union. The country also contends with an annual deficit just below 5% of GDP. Another credit rating agency, Fitch, already downgraded France’s rating from ‘AA’ to ‘AA-‘ in late April, citing unsatisfactory debt reduction plans and social unrest.
French Government’s Strategy
Finance Minister Bruno Le Maire asserts that the French government possesses a credible strategy to accelerate the reduction of the country’s debt. He aims to lower debt levels to 108.3% of GDP by 2027. Le Maire met with representatives from S&P earlier this week, making a compelling case for France’s debt reduction plan.
Meanwhile, Prime Minister Elisabeth Borne declared during an interview on Radio J that the Minister of Economy has engaged in “extensive discussions” with the agency regarding all the measures being taken to manage our public finances. Despite facing challenges, François Villeroy de Galhau, the head of the French Central Bank, stated on Wednesday that the nation has successfully overcome the most challenging phase of the inflation crisis.
From Extensive Spending to Debt Reduction Targets
France’s proposed debt reduction targets for 2023-2027 have raised concerns among opposition parties, who argue that this marks the beginning of austerity in Europe. In response to the COVID-19 pandemic, the French government pursued extensive public spending measures to sustain the economy. However, it is now shifting its approach, aiming to save €13.5 billion by 2030 through measures such as reforming pensions and encouraging the unemployed to actively seek employment. Before leaving for Guadeloupe and Martinique, Bruno Le Maire took care to call AFP on May 23 to announce that he was freezing 1% of credits, “a precautionary measure to meet our commitments for the 2023 finance law”, the Finance Minister explained.
Challenges of Public Debt
The resurgence of public debt as a pressing issue is attributed to the slowing economy and rising interest rates, which directly impact France’s public finances. In 2022, interest rates on French public debt amounted to nearly €50 billion. Yesterday, economists from ING highlighted the need for France to address the debt issue due to its economic implications.
Skepticism from Ratings Agencies and Investors
Ratings agencies, such as Fitch and Scope Ratings, have expressed concerns about the French government’s ability to repair its public finances. Investors have also exhibited caution, with French bond yields offering a higher premium over Germany, indicating potential doubts about France’s fiscal stability.