Public debt: social and political climate, repayment capacity… how do rating agencies give their rating?

Financial ratings allow French public entities to assess their financial health. The “AA —” level, awarded on October 11, 2024 by the Fitch company to France, is equivalent to 17/20. But who are these companies that can rate the State and what criteria do they use?

Three main rating companies

Fitch is not the only company to assess the financial health of France. It shares most of the global financial rating market with Moody’s and Standard & Pool, two other American companies. All issue a letter rating, ranging from “AAA” for a company with good creditworthiness, to “D”, in the event of bankruptcy (or “C”, for Moody’s). Moody’s diagnosis, which generally ranks France slightly above the other two, will be given on October 25, 2024. That of S&P Global is expected on November 29, 2024.

French debt is rated for free

Rating agencies are paid by the entity they rate. Except in the case of the richest countries, like France. French debt is rated free of charge, in an “unsolicited” manner. Rating agencies also need these ratings, which serve as a reference.

Analysis of financial inputs and outputs

To issue its rating, Fitch analyzed the financial inflows and outflows of French public entities. The analysts relied both on data provided by the State and those of other institutes such as Eurostat or the National Institute of Statistics and Economic Studies (Insee).

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The ability to repay debt

The ability to repay a country’s debt is generally the criterion that interests investors the most. Fitch predicts a sharp increase in public debt, which could reach up to +118% of GDP by 2028. The accuracy of government debt forecasts is also taken into account in the rating. During its April 2024 financial assessment, Fitch warned of a risk of a rating downgrade in the event of “a significant and persistent increase in debt […] resulting from higher than expected public deficits”. France had therefore decided to revise upwards its public deficit forecast for 2024, raising it to 6.1% of GDP.

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Social and political climate

For Fitch, the government’s ability to implement sustainable fiscal consolidation policies is reduced by the fact that it is in the minority. This political situation makes the budget vote uncertain and would not allow France to “reduce the deficit below 3% of GDP by 2029”, as it plans. In its April 2023 assessment, Fitch had already justified the downgrade of France’s financial rating, going from “AA” to “AA —”, among other things by social and political tensions, linked to demonstrations against pension reform. , like the Le Monde report. The company estimated that this climate could weigh on France’s ability to reduce the deficit and debt and reduce growth.