While the draft budget has only just been presented, the ax has already fallen. The rating agency Fitch, one of the three “Big Three” credit ratings in the world with S&P Global and Moody’s, has just lowered the outlook (outlook) of France’s credit rating from “stable” to “negative”. However, the rating remains unchanged at AA-.
In a short press release, Bercy takes note of the decision and emphasizes that the budget “reflects the government’s determination to redress the trajectory of public finances.”
France’s rating had already been downgraded by Fitch by one notch in April 2023, a decision followed a year later by S&P Global, also to AA-, with a stable outlook. Only the Moody’s agency maintained its rating one notch above, also at Aa2 with a stable outlook.
In a rating agency’s communication on sovereign risk, a “negative” outlook means considering that the probability of a rating downgrade within two years is greater than 33%. When this probability increases to 50%, the rating is then put “under surveillance” (credit watch). This is not really a probability strictly speaking but rather a reflection of historical observations.
The fact remains that this change of perspective a few hours before a budget debate which is barely beginning is a very bad signal. It reflects a significant loss of credibility in public discourse and commitments to reduce deficits.
Political fragmentation
The agency’s complaints to justify its decision are numerous: “the risks associated to fiscal policy have increased since our last review” (last April, Editor’s note); “The budgetary slippage (…) places France in a more unfavorable starting position” ; “we now expect larger budget deficits”.
Worse, the agency clearly questions the government’s ability to actually implement the plan to reduce deficits by 60 billion euros in one year. “We have cautiously included only part of the package, reflecting the continued political uncertainty and implementation risks of certain measures,” indicates (cautiously therefore) the agency, which therefore does not expect France to respect its medium-term deficit forecasts.
The government’s gray areas on cuts in the 2025 budget
And already, “France’s deficit in 2024 will be the second largest in the euro zone, and almost three times the median deficit forecast for category AA countries”, and the spending to GDP ratio is one of the highest in “our sovereign rating universe” then even “that tax levels are already very high”. In short, it is a final indictment.
Bad omen
Remember that for a rating agency, the crux of the matter is the capacity of a State to raise taxes (or to generate cash flows for a company). Until now, France was considered the champion in raising taxes. However, it is starting to find its limits in this area, and the rating agencies do not like this at all.. “There is a lack of political consensus in France to reduce deficits”recognizes an economist from a large bank. This is what the agency notes: “Strong political fragmentation and a minority government complicate France’s ability to implement sustainable fiscal consolidation policies.”
Fitch’s decision does not bode well for the opinions expected in the coming days or weeks from Moody’s (October 25) and S&P Global (November 29). The Moody’s agency was already at the end of September, according to Barclays analysts, “the candidate most likely » to assign a negative outlook given that it rates one notch above Fitch and S&P Global, and has not downgraded the rating in recent years, unlike the others. This could herald a rating downgrade next year. As for S&P Global, at the end of November, the agency will have in hand both the voted budget and feedback from the European Commission’s observations to assess its opinion. A change of perspective appears more and more likely.
Taxes, taxes: the great doubt of deputies about the government’s forecasts
The only consolation to be expected is that this deterioration in the outlook should have little impact on the market, and in particular on France’s risk premium (spread) compared to German debt, the benchmark in the euro zone. For a simple reason: this risk premium is already very high, at almost 77 basis points. A risk premium equivalent to a rating which would be two to three notches below that of France.
Portugal, which is rated BBB+ by Fitch, four notches below France, displays a spread by 50 basis points with Germany! “Investors who yesterday hesitated between Germany and France now have the choice between Germany, Portugal, Spain and, in fourth place, France”summarizes an asset allocation specialist.
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