The downgrade of France’s credit rating causes difficulties for the Macron government

Unlock Editor’s Digest for free

Roula Khalaf, FT Editor, picks her favorite stories in this weekly newsletter.

France has been downgraded by S&P Global, a blow to Emmanuel Macron’s credibility as a steward of the economy that has been the highlight of his presidency.

The credit rating agency changed France’s long-term issuer rating from AA to AA- with a stable outlook, citing concerns that the trajectory of government debt as a share of gross domestic product will increase until 2027 and not decrease as previously forecast.

S&P also cited France’s lower-than-expected growth rate as a factor. It expressed concern that “political fragmentation” would make it difficult for Macron’s government to enact reforms aimed at boosting growth or “addressing budget imbalances.”

The downgrade risks having significant political consequences for Macron, but the financial impact is likely to be limited as was the case with the significant downgrades carried out in the wake of the eurozone crisis about a decade ago.

The bad news on public finances comes as Macron’s centrist coalition is poised for a heavy defeat in the European elections on June 9. Polls put it at 17.5 points behind Marine Le Pen far-right Rassemblement national party, according to Ipsos. Opposition parties are preparing to debate two no-confidence motions on Monday to protest the government’s handling of the budget, although at this stage they have little chance of passing.

Macron no longer boasts a parliamentary majority, making it more difficult for him to pass laws or budgets, even though the French constitution gives the government the power to impose on lawmakers on issues. budget issue.

Charles-Henri Colombier, director of S&P, said: “S&P’s downgrade is justified because of all the countries in the eurozone, only two remain with high debt ratios on GDP is so high that it is getting worse – France and Italy.” Rexecode Economic Institute. “It’s a warning to the government that they need to do more to cut spending, not just seek to boost growth.”

The government has been preparing for a rating downgrade since then it reveals In January, the country’s deficit was larger than expected last year, at 5.5% of GDP versus forecasts of 4.9%.

While the deficit is typical in a country that has not balanced its budget for decades, the Eurozone’s second-largest economy is facing an unforeseen shortfall of 21 billion euros in taxes by 2023.

The situation has exposed the limits of Macron’s strategy since he was first elected in 2017 – cutting taxes on companies and rolling out business-friendly reforms in the hope that Such an attitude would spur enough growth to pay for France’s generous social welfare model.

While unemployment fell to its lowest level in decades and foreign investment increased, the government continued to spend heavily on public services as well as special measures to protect businesses and households from the consequences of the pandemic and energy crisis.

That increased the deficit and led to a national debt bubble.

When interest rates are low, the impact is minimal, but borrowing costs have increased from 29 billion euros in 2020 to over 50 billion euros this year – more than the annual defense budget. They are expected to reach 80 billion euros by 2027.

France said it still aims to bring the deficit back to 3% of output, the EU threshold, by 2027, the end of Mr. Macron’s second term. However, economists say that is very unlikely and S&P’s new forecast is that the deficit-to-GDP ratio will be at 3.5% in 2027.

“We believe that the French economy and public finances in general will continue to benefit from the structural reforms implemented over the past decade,” S&P said. “However, if there are no additional measures to reduce the budget deficit. . . reforms will not be enough for the country to meet its budget targets.”

General government debt as a proportion of GDP “will steadily increase” to 112.1% of GDP in 2027, from 109% last year.

Macron’s finance minister, Bruno Le Maire, is working to find savings on everything from climate policy to subsidies for hiring apprentices to cut another 10 billion euros this year. after reduction worth 10 billion euros in January.

According to the Budget, at least another 20 billion euros in cuts will be needed next year, but the risk is that these will slow growth.

The government also insisted it would not raise taxes on households or companies, a highlight of Macron’s economic policy. Opposition parties have criticized this stance as unrealistic due to budget shortfalls.

The government forecasts growth of 1% this year, higher than the Bank of France’s prediction of 0.8%.

Experts say the S&P downgrade is not expected to have a major impact on France’s borrowing costs because investors still view the country as a trustworthy entity. The gap between German and French 10-year bonds even narrowed slightly this year.

“Our debt easily finds buyers in the market,” Le Maire told Le Parisien newspaper after the downgrade. “France still has a reputation as a high-quality publisher, one of the best in the world.”