S&P Global Ratings is set to assess French debt amidst political instability as the government faces a challenging budget debate. With a plan to cut spending by 60 billion euros and raise taxes, the outcome of S&P’s review could impact France’s credit rating. Following a recent downgrade, economists predict possible further negative actions, especially if budget approval fails. Rising borrowing costs and increasing market tension are concerns, particularly as the government navigates a fragile political landscape.
S&P Set to Review French Debt Amid Political Turmoil
This Friday, the rating agency S&P Global Ratings will join Moody’s and Fitch in evaluating French debt amidst a challenging budget debate in Parliament. The French government is grappling with the looming threat of “serious turbulence” as it fights to maintain its position.
S&P’s upcoming decision is critical as the government attempts to justify its budget plan for 2025, which seeks to mend the nation’s severely strained public finances through a combination of “60 billion euros” in spending cuts and tax hikes. Charles-Henri Colombier, director of economic studies at Rexecode, informed AFP that “political instability is likely to persist for some time,” suggesting that it would be reasonable for S&P to take this into account.
Potential Outcomes for France’s Credit Rating
In May, S&P downgraded France’s rating from “AA” to “AA-” with a stable outlook, indicating a reduced risk of an immediate downgrade. However, economist Norbert Gaillard mentioned to AFP that it would be unexpected for S&P not to issue any unfavorable action, possibly adjusting the outlook to negative.
Since spring, France has experienced a series of setbacks, including the dissolution of the National Assembly and delays in appointing a new Prime Minister, coupled with concerning revisions to public deficit forecasts. Gaillard highlighted that the current environment signals either a downgrade or placing the rating under negative watch to indicate “significant stress” that could escalate rapidly.
The S&P decision may hinge on the outcome of the budget vote and the proposed fiscal measures, as well as the stability of the current government. A negative outlook might not significantly impact France’s borrowing costs, yet a downgrade could trigger heightened tension in the markets, as it would categorize France as a less secure investment, leading to a drop in demand for its bonds and a subsequent rise in yield rates, as noted by Eric Dor, director of economic studies at IESEG School of Management.
Under the leadership of Michel Barnier, the minority government is navigating a precarious political landscape with the goal of reducing the public deficit from 6.1% of GDP in 2024 to 5% in 2025, ultimately aiming for below 3% by 2029, a plan recently endorsed by Brussels. However, the government is considering invoking Article 49.3 of the Constitution to pass budgets without a vote, which could lead to risks of being ousted by opposition censure motions.
According to Barnier, such a scenario could have dire consequences, warning on TF1 that “there will probably be a fairly serious storm and serious turbulence in the financial markets.” Signs of market agitation are already evident, with the spread between French 10-year sovereign rates and Germany’s—considered a safe haven—reaching its highest level since 2012.
Failure to pass a budget could exacerbate the country’s public deficit and lead to rising interest rates on its debt, which is already approaching 60 billion euros annually just for interest payments. Budget Minister Laurent Saint-Martin cautioned on France Inter that allowing the situation to deteriorate could see costs escalate to 70 or 80 billion euros.
Currently, France’s borrowing rates surpass those of Spain and Portugal and are nearing those of Greece, which holds a lower rating. Gaillard expressed concern over the deputies’ understanding of the challenges facing the nation, highlighting the tense discussions expected in the National Assembly regarding the repeal of the 2023 pension reform.