However, these agencies are not immune to conflicts of interest because they are paid by debt issuers, raising questions about their impartiality. Their liabilities, marked by notable rating errors before the financial crisis, subprime and Greece’s financial difficulties, reinforced these doubts about their competence.
However, the impact of these ratings is immense. They are a crucial barometer of a state’s ability to repay its debt on the financial markets. The criteria assessed range from economic stability to governance to tax policies, influencing not only access to financial markets, but also the minimum reserve requirements of banks.
In this context, for more than ten years, France seems protected by the shield represented by the European Central Bank (ECB) and Mario Draghi’s “whatever it takes” of July 26, 2012. Also, it would have been difficult to imagine a downgrading of France’s rating by Fitch and Moody’s in such a geopolitical context for NATO.
In the media, many expected last Friday a deterioration of the French rating which would hit the CAC 40, in particular. As a reminder, the only time a rating agency truly shocked the markets was on August 5, 2011 when the United States’ rating was downgraded by S&P, in a technical environment favorable to a correction.
France’s current budgetary challenges are considerable. Debt has reached a record, passing the barrier of 3,100 billion euros, an increase of almost 1,000 billion euros under the Macron/Lemaire presidency, and a debt/GDP ratio exceeding 111% in 2023. The budgetary cavalry of the French state, which has become obese since the pandemic, has recently increased with the aid allocated to Ukraine at the end of 2024, which should be valued at 6.8 billion euros at the end of the year, and by the expected cost of the Paris 2024 Olympic Games for the State, estimated between 3.3 and 5.2 billion euros. The deficit projected by Bercy in 2024 is 5.1% (compared to 5.5% currently). To achieve this objective, the government will have to find 10 billion euros in additional tax revenue, under penalty of sanctions from the European Union (which could range from 0.2% to 0.5% of its GDP) and an increase debt charges. This situation highlights the challenges France faces in reducing its deficit and stabilizing its debt, particularly in a context of growing economic and political pressures domestically and internationally.
Despite budgetary challenges, France still benefits from a high rating, justified by the agencies by strong internal consumption, declining inflation, reliable public institutions, a robust public financing system and the resilience of the economy in the face of crises. . However, the higher than expected public deficit and the difficulty in reducing public spending are often mentioned and weigh on the evaluation.
Has France provided rating agencies with guarantees of future tax increases to avoid a downgrade?
There is no doubt that Fitch and Moody’s were reassured on this subject, in particular by French tax creativity. Measures such as the increase in various taxes (such as the property tax with an increase of 3.9% in 2024) or the liquidation of the public real estate stock (190,000 buildings), valued at around 5 billion euros, suggest this possibility. . The fact that the French pay their taxes well is also integrated into this equation.
However, it is important not to cross a certain red line, which seems close, with regard to a French taxpayer suffocated by inflation and tax pressure. The taxation of annuities, training accounts (€100 per account would bring in 200 million euros to the State), sales of second-hand books, the “rabbit” tax of €5 in the event of a missed appointment at the doctor, the new increase in the tax on verandas and garden sheds… could prove provocative. Let’s not forget that political stability is a key rating criterion.
Investors and the Macron government are now waiting for May 31 for the verdict of the third agency, the most watched, nine days before the European elections. S&P currently rates France AA, equivalent to Moody’s Aa2, but its outlook is negative.
