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Could France's soaring deficit and debt lead to a rating downgrade?

Ahead of the Olympic Games in Paris, the fiscal outlook is not looking so positive
Ahead of the Olympic Games in Paris, the fiscal outlook is not looking so positive Copyright Michel Euler/Copyright 2023 The AP. All rights reserved.
Copyright Michel Euler/Copyright 2023 The AP. All rights reserved.
By Piero Cingari
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France is under intense fiscal scrutiny as it approaches weeks filled with critical events, including imminent ratings reviews from credit rating agencies. Economists warn that significant fiscal tightening may be required to prevent a downgrade.


The French government is approaching a crucial phase in the upcoming weeks, with its fiscal policies under intense scrutiny. By the end of April, it is slated to present its stability programme, which will update its medium-term fiscal strategy. Critical moments on the horizon include ratings reviews from Moody's (currently AA with a stable outlook) and Fitch on April 26 (AA- with a stable outlook), with a subsequent evaluation from S&P on May 31 (AA with a negative outlook).

Recent projections from the International Monetary Fund indicate that France's public deficit will remain above 4% until 2029, nearly double the euro area's average, with public debt expected to rise to 115% of GDP in the coming years. The European Commission has already signalled potential conflicts with EU fiscal rules in its response to France's 2024 budget plan, highlighting the risks of a negative adjustment by S&P due to its current negative outlook.

President Macron has little to smile about at present
President Macron has little to smile about at presentCaroline Blumberg/AP

Is France's fiscal outlook truly as grim as it seems, and what measures are essential to mitigate the potential negative impacts on its economy and financial markets from a potential rating downgrade?

Analysis of the France's fiscal landscape

The IMF's latest fiscal outlook suggests France's government deficit will only slightly decrease from an upwardly revised 5.5% of GDP in 2023 to 4.9% in both 2024 and 2025. The deficit-to-GDP ratio is expected to stay above 4% until 2029, significantly higher than the euro area's average throughout the forecast period.

Additionally, the country's government debt is projected to climb from 110.6% of GDP in 2023 to 115.2% by 2029, nearly 30 percentage points above the euro area average.

Goldman Sachs economist Alexandre Stott noted: "The 2023 deficit alone has shifted the debt-to-GDP trajectory durably higher. But the degree of deterioration crucially depends on the deficit trajectory from here." 

Stott suggested that policy corrections might predominantly involve expenditure reductions rather than revenue increases, including potential central government budget cuts, incentives for local authorities to control spending, and tighter labour market policies.

ING economist Charlotte de Montpellier believes that the French government's aim for a 4.4% GDP deficit in 2024 now appears unachievable, with potential deficits exceeding 5% again due to a worse-than-expected starting point and weaker growth projections. In addition, the complex political landscape, marked by the government's lack of a parliamentary majority, complicates any public finance legislation.

"The government will have to announce measures in order to avoid a downgrading,' de Montpellier wrote. She also expects France's fiscal policy to shift from very expansionary to more restrictive going forward, weighing on economic growth.

Bank of America economists Evelyn Herrmann and Erjon Satko argue that France's fiscal dynamics "merit special consideration," noting that "the 2023 slippage has arguably put that exact debt trajectory out of reach". A return to the 3% deficit threshold within this decade seems elusive, and a declining debt ratio could become a tail risk.

Could France face a credit rating downgrade?

A particularly critical watchpoint is S&P's current stance, which, as of December 2023, positioned France's sovereign debt at an AA rating with a negative outlook. The agency underscored the potential for downgrading France's rating within the next year unless there are significant reductions in budget deficits to decrease the general government debt-to-GDP ratio, or if general government interest payments exceed 5% of revenue.

The government will have to announce measures in order to avoid a downgrading
Charlotte de Montpellier, ING economist

This looming downgrade is influenced by several factors, notably high public spending which hampers efforts at budgetary consolidation, or economic performance failing to meet expectations.

What implications this might have?

A credit rating downgrade generally leads to higher interest rates on government bonds, thus increasing France's borrowing costs. This rise could exacerbate fiscal pressures by inflating debt servicing expenses, potentially deepening deficits unless mitigated by significant fiscal reforms, such as cutting government expenditure or increasing taxes. Essentially, France may be steering towards renewed fiscal austerity.

Currently, the yield on France's 10-year government bonds—a primary gauge of the Elysée's cost to issue new debt in the market—is around 3%, nearly triple its 10-year average. The spread - or yield differential - compared to German Bunds stands at 50 basis points. This spread could expand following a negative credit rating decision.

As Europe's second-largest economy, a downgrade could undermine investor confidence, affecting not only the French bond market but also the broader equity and investment landscape in the region.

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