A rating maintained, but uncertainties remain
In a delicate economic context and an unstable political situation, France benefited from good news: the S&P rating agency decided, at the end of November 2024, to maintain its credit rating at “AA-”, with an outlook “ stable “. This announcement was received as a relief by the government (forced to resign on December 4, 2024), after the successive downgrades of the French rating by other agencies such as Fitch and Moody's. In October 2024, the latter had lowered France's outlook from “stable” to “negative”.
In his press releaseS&P welcomed the government's attempts to “reduce the deficit and restore our public finances”while specifying that France could encounter difficulties in achieving its short-term budgetary objectives due to political instability. “Despite political uncertainty, we expect France to comply – with a delay – with the European Union budgetary framework and gradually consolidate its public finances in the medium term”explained the agency.
Increased pressure on public finances
Despite maintaining the rating, France's economic situation remains precarious. The country faces a colossal public deficit, estimated for 2024 and 2025 at almost 100 billion additional euros compared to initial forecasts. This situation has fueled strong concern on the markets, accentuated by the political uncertainty surrounding the budget and the reforms necessary to stabilize public finances.
The yield gap on French debt compared to German debt recently reached alarming levels, briefly climbing to 90 basis points, the highest since 2012. This phenomenon reflects the growing mistrust of investors towards economic prospects for France. According to Ninon Bachet, strategist at Société Générale, “whatever the scenarios, we believe that the range of French debt spreads will remain much higher than during the pre-election period”.
This market stress can be explained by the apparent incapacity of the political class to propose a credible solution to restore public finances. “There is a major concern on the market, and it is not a concern about the 2025 deficit, but rather a concern about the process, about France's inability to design a budgetary adjustment”underlines an observer of the economic situation.
Tensions on the markets are palpable, with rate spreads reflecting the growing climate of distrust among foreign investors, some of whom, like Japanese institutional investors, began to divest from French debt this summer.
The risk of a worrying spiral
While the maintenance of France's rating by S&P may seem reassuring at first glance, some experts point out that this decision could ultimately have counterproductive effects. Indeed, after several downgrades, the country had managed to maintain its status as a high quality issuer on the markets. But today, this status is increasingly weakened. “France has passed into another world since the dissolution”notes a financial analyst, referring to the chaotic budgetary debates and the inability of political leaders to propose a credible solution to the crisis.
The cost of French debt has thus increased significantly: it is now trading at levels corresponding to a rating two notches lower than the current rating. This situation reflects investors' distrust regarding the future development of French public finances. For economists, this phenomenon could lead to a spiral of distrust, with investors who, beyond a certain threshold of acceptability, could decide to massively sell their French bonds.
S&P's decision is therefore a temporary relief, but France must still convince the markets that it is capable of restoring its public finances in the medium term. The reopening of Treasury bond auctions in January could constitute a decisive test for the future of French debt.
