Michel Barnier, Prime Minister, has the difficult task of restoring some credibility to the state budget. In nine months, excluding corrective measures, the 2024 and 2025 budget will have in fact slipped, under previous governments, by 100 billion euros compared to forecasts last January.
This inconsistency is starting to make itself felt. The risk premium of French debt compared to German debt now oscillates between 70 and 80 basis points. It is more expensive than Spain, Portugal or Ireland. This rate difference (spread) was 55 basis points a year ago.
The government avoids sanction from Moody’s and Fitch: Gabriel Attal praises “the credibility of France” and its attractiveness
The rating agencies are on the lookout. Last April, the S&P agency had already downgraded France’s rating by one notch to AA-, with a stable outlook, thus joining Fitch’s rating (stable outlook). Only the Moody’s agency maintained its rating one notch above at Aa2, still with a stable outlook. The next review of the agencies, in October and November, risks hurting.
Change of perspective in sight
“Logically, given the deterioration of public finances and the few levers to act, one or two agencies should move to a negative outlook, which would give them more room to downgrade the rating next year if necessary,” a manager steps forward. All eyes are obviously on the Moody’s agency, which must make a decision on October 25, during the full examination of the 2025 budget in Parliament.
On the markets, however, investors are not expecting a panic on French debt. « Rating agencies have less influence on sovereign debt than on corporate debt. An agency’s opinion ultimately only validates a degraded (or improved) situation, already integrated by the market. It is for this reason that the impact of a change of opinion is often limited,” explains Xavier Chapard, strategist at LBP AM. On the other hand, this public display has the gift of annoying governments.
Already integrated by the markets
In fact, a spread of 80 basis points is already equivalent on the market to a rating of France two or three notches lower, on the border of A/A3 and BBB/Baa1, depending on the agencies’ rating scale. In short, the bad news is already known and only a new slippage or a diet crisis could cause the price to rise. spread towards 90 basis points, according to analysts at Barclays. In a more favorable scenario of credible budgetary consolidation, a return to 65 basis points is not excluded, again according to the British bank.
“We are witnessing a lasting but silent increase in France’s risk premium,” regrets Christopher Dembik, investment strategy advisor at Pictet AM. “It’s always a worrying signal, the markets don’t like it and it could scare off some big investors,” explains Catherine Gerst, professor of finance at Paris-Saclay and former boss of Moody’s France. The massive sale last July of French debt by Japanese investors did not go unnoticed.
Collateral effects
“The subject of our exposure to debt issued by the French State returned to the center of our concerns at the start of 2024 in anticipation of the downgrading of the rating by S&P. The uncertain political context pushed us to take a break before returning this summer given greater visibility and the widening of France’s spread. recognizes Gaël Moreau, head of asset management at insurer MAIF.
But, he specifies, “it is not so much the French debt which arouses our concern as the collateral effects of a possible downgrade (of France’s rating) on private issuers which are linked to the sovereign rating, and which may have an impact on our solvency ratios”. This is particularly the case for the debt of French banks, which are large issuers on the market. But also many sectors, such as community services.
A note that remains of quality
“France’s rating remains in a quality category. Very few investors have exclusion criteria within the investment grade category itself, at least as long as the rating remains in the A category.puts Xavier Chapard into perspective.
In short, there is room. Then, an investor who wishes to buy quality sovereign debt in the euro zone has little choice but to buy French debt, for lack of alternative, Germany issuing little debt. “France has always been Germany’s stowaway,” laughs Xavier Chapard. For Gaël Moreau, “there will still be investors in French loans, especially as the credit market remains relatively expensive.”
But the “privilege” of French debt, the one that successive finance ministers regularly boast about on the theme “there will always be buyers despite the deficits”, could be tiring.
Gradual decommissioning
« French debt has always been better regarded than the debts of other countries with equivalent ratings in the euro zone. This is no longer necessarily the case today,” recognizes Xavier Chapard. “France has always been able to reassure rating agencies with its capacity and ingenuity to raise taxes,” recalls Catherine Gerst, who however today questions the high level of taxation. In terms of market prices, France is clearly relegated to the “peripheral countries”, those that were called, with a certain disdain, in the 2010s, the “PIGS”.
The fact remains that the French debt rate, the interest actually paid, is lower today than it was a year ago. “The monetary context is more favorable. The France-Germany spread may widen but French debt will still be affected by the European Central Bank’s rate cut. relates Gaël Moreau. The French rate should therefore gradually slide below 3%… even if it does so less quickly than other countries!
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