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France was downgraded by S&P Global in a blow to Emmanuel Macron’s credibility as a steward of the economy, once a bright spot of his presidency.
The rating agency changed the French issuer’s long-term 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 through 2027 and not decline as originally projected.
S&P also said France’s lower-than-expected growth was a factor. She expressed concern that “political fragmentation” would make it difficult for Macron’s government to adopt reforms to support growth or “address the budget imbalance”.
The downgrade risks precipitating a major political fallout for Macron, but the financial impact is likely to be limited, as was the case with the last major downgrade in the wake of the eurozone crisis roughly a decade ago.
The bad news on public finances comes as Macron’s centrist alliance is poised for a landslide defeat in European elections on June 9. Polls show him 17.5 points behind Marine Le Pen’s far-right Rassemblement National party, according to Ipsos. Opposition parties are set to debate two no-confidence motions against the government’s handling of the budget on Monday, although they have little chance of passage at this stage.
Macron no longer boasts a parliamentary majority, so he has more difficulty passing legislation or the budget, although the French constitution allows the government to override lawmakers on budgetary matters.
“The downgrade by S&P is legitimate because of all the eurozone countries, only two remain with such high debt-to-GDP ratios that are only getting worse – France and Italy,” said Charles-Henri Colombier, director of the Rexecode economic institute. “It’s a warning to the government that it needs to do more to reduce spending, not just seek to boost growth.”
The government is bracing for a downgrade after revealing in January that its deficit was higher than expected last year at 5.5 percent of GDP, compared with a forecast of 4.9 percent.
While deficits are typical in a country that hasn’t balanced its budget in decades, the eurozone’s second-largest economy faces an unpredictable tax revenue shortfall of 21 billion euros in 2023.
The situation showed the limits of Macron’s strategy since he was first elected in 2017 – to cut corporate taxes and enact pro-business reforms in the bet that such moves would boost growth enough to pay for France’s generous social security model.
While unemployment has fallen to its lowest level in decades and foreign investment has increased, the government continues to spend heavily on public services as well as on exceptional measures to protect businesses and households from the effects of the pandemic and the energy crisis.
This deepened the deficit and led to inflation of the national debt.
When interest rates were low, the impacts were small, but borrowing costs rose from €29 billion in 2020 to more than €50 billion this year – more than the annual defense budget. They are to reach 80 billion euros in 2027.
France says it is still aiming to bring its deficit back to 3 percent of output, the EU threshold, by 2027, the end of Macron’s second term. But economists see that as highly unlikely, and S&P’s new forecast projects the deficit-to-GDP ratio to be 3.5 percent in 2027.
“We believe that the French economy and public finances overall will continue to benefit from the structural reforms implemented over the past decade,” S&P said. “However, without additional measures to reduce the budget deficit . . . the reforms will not be enough for the country to meet its fiscal targets.
The government debt-to-GDP ratio “will steadily increase” to 112.1 percent of GDP in 2027, up from 109 percent last year.
Macron’s finance minister, Bruno Le Maire, has sought to find savings in everything from climate policies to subsidies for hiring apprentices to cut another €10 billion this year, following a €10 billion cut in January.
At least 20 billion euros in cuts will be needed next year, according to the budget ministry, but there is a risk that this will dampen growth.
The government also insisted it would not raise taxes on households or businesses, a hallmark of Macron’s economic policies. Opposition parties criticized this stance as unrealistic given the hole in the budget.
The government is forecasting growth of 1 percent this year, higher than the Bank of France’s forecast of 0.8 percent.
Experts said the S&P downgrade was not expected to have much of an impact on France’s borrowing costs as investors still viewed the country as a reliable entity. The spread between German and French 10-year bonds has even narrowed slightly this year.
“Our debt will easily find buyers in the market,” Le Maire told Le Parisien after the downgrade. “France still has a high-quality reputation as an issuer, one of the best in the world.”