Relegation or status quo? The rating agency Moody’s will publish this Friday its assessment of France’s sovereign debt rating, a high-risk event for the country, weakened by the drift of its public finances.
A cut is feared, in the midst of a debate in the National Assembly on public finances: the government is trying to save 60 billion euros in the budget for 2025, to reduce the public deficit to 5% of GDP and try to recover control of a colossal debt.
Moody’s currently rates France “Aa2” (the equivalent of 18 on a 20-level rating scale), one step above the other two big agencies Fitch and S&P (“AA-“), and could align with them despite an outlook “stable”.
“It would be better for France if the agency simply lowered the outlook to negative while keeping the rating unchanged. But the probability that Moody’s will downgrade the rating is very high,” warns Éric Dor, director of economic studies at the IESEG School of Management. “The differences in the ratings assigned by the agency between France and many lower-rated countries are now very difficult to justify,” with French macroeconomic performance often falling short.
Such a downgrade could weigh on the rates at which France borrows on the markets, while it is already under pressure due to budget difficulties and political instability resulting from early legislative elections in June-July.
Interest rates equivalent to those of Portugal or Spain
French debt continues to attract investors, but its interest rates are now at the level of those of countries such as Portugal or Spain, which are considered riskier. “We are today, in Europe, one of the most isolated countries in terms of deficit and debt”, and “our European partners are watching us”, admitted the Minister of Economy and Finance Antoine Armand on Tuesday on the TF1 channel.
According to the Asterès company, rather than the decisions of the rating agencies, the consequences of which would, according to it, be “limited to the financial burdens of the French State”, it is the French situation that is more important.
The debt burden is now the second largest budget item after education with over 50 billion euros and could become the first by 2027. This further reduces the financial room for maneuver.
“Often the impact of a downgrade is insignificant because investors in the markets were already aware of the problems of the country concerned and already took them into account when determining the interest rate required on its bonds,” observes Éric Dor.
“Insufficient” assets.
To preserve France’s credibility, the government wants to reduce public spending in 2025, of which it is the champion in Europe, and increase taxes on businesses and wealthy taxpayers. However, he struggles to convince a fragmented National Assembly, where he is in a minority.
The French asset (diversified economy, solid fiscal and banking system in particular) “risks being insufficient” in the face of the difficulty “of obtaining a majority to vote on the measures necessary for the recovery of public finances”, underlines Éric 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%.
The International Monetary Fund (IMF) warned on Wednesday against the risk of a significant slide without further efforts: the deficit would reach 5.9% next year and remain at this level in 2029, with debt peaking to 124.1% of GDP over this horizon. . More than double the maximum set at 60% by Brussels.
Moody’s decision will come two weeks after that of Fitch, which placed France under “negative outlook” without revising its rating downwards, despite “increasing risks (…)” and doubts about the official deficit forecasts . S&P is due to make a decision on November 29. In May it lowered its French credit rating from “AA” to “AA-”.
Interviewer: Good afternoon, everyone! Welcome to another edition of Time.news. Today, we have a very special guest, Éric Dor, Director of Economic Studies at the IESEG School of Management. With Moody’s assessment of France’s sovereign debt rating coming out this Friday, we’re diving into the implications of this potential change. Éric, thank you for joining us.
Éric Dor: Thank you for having me. It’s a pleasure to be here.
Interviewer: So, we’re all on edge as we await Moody’s rating. You mentioned that there’s a “very high” probability of a downgrade. Can you explain why you believe this will happen?
Éric Dor: Absolutely. France’s public finances have been under strain for some time now, and there are widespread concerns about the government’s ability to manage its colossal debt. While Moody’s currently rates France as ”Aa2,” which is quite high, the financial indicators and international comparisons raise questions about the justification for that rating.
Interviewer: Speaking of comparisons, you pointed out that French debt is now attracting interest rates comparable to countries perceived as riskier, like Spain and Portugal. What does this say about France’s economic standing in Europe?
Éric Dor: It signifies that there is growing skepticism about France’s financial health among investors. Despite still being a major economy, France has become increasingly isolated regarding its deficit and debt levels compared to its European partners. The Minister of Economy, Antoine Armand, highlighted that our situation is being closely monitored by other EU nations, and that alone is a cause for concern.
Interviewer: If Moody’s were to downgrade France’s rating, what kind of financial impact could we expect?
Éric Dor: A downgrade could increase the interest rates at which France borrows money on the markets, adding pressure to an already difficult budget situation. However, it’s worth noting that often the impact of such downgrades is muted because investors usually factor in a country’s problems before a formal downgrade occurs.
Interviewer: Interesting point. Given that the debt burden is projected to become the largest budget item by 2027, do you think the French government can successfully navigate this challenge?
Éric Dor: It’s a significant challenge, indeed. The current plan includes attempting to save 60 billion euros in the budget for 2025 in order to bring the public deficit down to 5% of GDP. However, with the ongoing political instability and the criticism of how public finances are being managed, achieving this will require not only strong economic policies but also political cohesion.
Interviewer: You mentioned that the consequences of potential agency decisions might be limited. Could you elaborate on why the French situation might be more critical?
Éric Dor: Yes, that’s an important distinction. The state of France’s economy and governance is more pivotal. Investors are often not just responding to ratings agencies but are also keenly aware of the fundamental economic challenges. So, while ratings matter, the actual economic performance is what ultimately influences investor behavior.
Interviewer: As we await Moody’s verdict, do you think there are any measures the government could take to bolster confidence before the announcement?
Éric Dor: Transparency and decisive action are key. The government could strengthen its messaging around fiscal responsibility and outlined budget cuts. Additionally, demonstrating a commitment to structural reforms that can enhance economic resilience will be critical in reassuring investors and rating agencies alike.
Interviewer: Thank you, Éric. Your insights are invaluable during what is certainly a turbulent time for France’s economy. We’ll be keeping a close eye on Moody’s assessment this Friday and the subsequent reactions from the markets and government.
Éric Dor: Thank you! It’s an ongoing situation, and I appreciate the opportunity to discuss these important issues.
Interviewer: And thank you to our audience for tuning in. We’ll keep you updated on the latest developments regarding France’s sovereign debt rating. Until next time!