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Why do France and Belgium risk credit rating downgrades in 2024?

People walk with luggage with the city of Brussels as a backdrop (file photo)
People walk with luggage with the city of Brussels as a backdrop (file photo) Copyright Virginia Mayo/AP
Copyright Virginia Mayo/AP
By Piero Cingari
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The risk of sovereign credit downgrades is increasing for France and Belgium, as both countries contend with escalating fiscal deficits and debts. Scope Ratings emphasised Europe's post-crisis fiscal strain, underscoring the urgency for actions.


France and Belgium are under the close watch of major rating agencies, with recent fiscal developments signaling mounting risks for a potential sovereign credit rating downgrade later this year if important reforms are not adopted.

Following the International Monetary Fund's latest forecasts, which indicate a progressive deterioration in France's debt in the coming years – as Euronews highlighted here – a further cautionary note was raised this week by Scope Ratings.

Analyst Alvise Lennkh-Yunus remarked that "weak governments struggling to implement consistent medium-term fiscal plans are putting credit ratings of some euro area sovereigns under pressure."

Post-crisis fiscal challenges in Europe

According to Scope Ratings, Europe faces structurally higher public debt levels after the pandemic and energy crises, and fiscal disparities across euro area sovereigns have widened since these events.

As France's public debt soared to 111% at the end of 2023, it is expected to remain nearly 50 percentage points higher than that of Germany by the end of the decade.

This marks a significant shift from the near zero differential between 1992, when the Maastricht Treaty was signed, and 2012, at the height of the euro area crisis.

Lennkh-Yunus stressed that this situation matters a lot because different public debt levels imply varying capacities to respond to the next economic shock.

Europe is now tasked with addressing crucial policy priorities, including the green transition, welfare costs due to an aging population, NATO defence commitments, and support for Ukraine. These priorities translate into higher spending and investment needs, estimated at about 3-4% of GDP, occurring during a period of modest economic growth.

Scope Ratings expects permanently higher interest rates compared with pre-Covid years, even as central banks plan to ease rates starting later this year. This will raise the governments’ interest bills for the years to come.

"Interest payments will continue to rise as public debt issued at lower rates before and during the pandemic matures and is now refinanced at higher rates. Italy, Germany, France, and Spain collectively will pay almost EUR 170bn more in interest in 2028 compared to 2020," Scope Ratings highlighted.

While the proportion of net interest payments to revenues is expected to stay below past peaks, these elevated interest payments will restrict fiscal maneuverability, leading governments to cut expenditures, raise taxes, or increase borrowing.

Fiscal challenges in France and Belgium: Complacency is a risk

Countries with high tax burdens, like France and Belgium, may be averse to further tax increases. An alternative may be to rebalance tax structures, shifting from labour—which is in short supply—towards capital, ownership, and environmental taxes, as Scope Ratings suggested.

For several European nations, complacency poses a significant risk. Governments that procrastinate on essential reforms risk a crisis of confidence, potentially necessitating ad hoc austerity measures detrimental to public investments and growth.

With both countries carrying a Negative Outlook, there's a risk that they may not fully acknowledge their financial limitations. France must find additional savings of around €50bn, or 2% of GDP, to manage a budget deficit that stood at 5.5% of GDP in 2023 and is projected to remain above 4% until 2029, in advance of the 2027 presidential elections.

Belgium faces the largest fiscal deficit in Europe, exceeding 5% of GDP in the coming years, leading to a continuous increase in debt levels, and positioning it as the third-highest in Europe by 2028, trailing only behind Greece and Italy.

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