After the rating agencies Fitch and Moody's lowered, last October, the outlook for France's credit rating by « stable » has “negative”, the last agency to comment, S&P Global, decided to maintain both France's rating at AA- but also to maintain its outlook at « stable ». This is a surprise since the market consensus was counting on a lowering of the outlook for the rating, like its major counterparts. It is true that S&P Global had already downgraded France's rating by one notch last May.
The Minister of the Economy, Antoine Armand, immediately welcomed S&P Global's decision, which “testifies to the credit given to the government to reduce the deficit and restore our public finances.”
The Fitch rating agency sounds the alarm on France's debt
In the midst of a budgetary crisis, and threats of censorship in Parliament, this status quo is a relief for the government, and will undoubtedly be seen as an encouragement for the Prime Minister, Michel Barnier, to carry out his accounts recovery project. public.
“France remains a balanced, rich and diversified economy,” explains the rating agency in its press release. “ Despite the current political instability, we expect France to comply – with some delay – with the European Union's budgetary framework and gradually consolidate its public finances in the medium term. she adds.
France therefore maintains its AA- rating, in the “high quality” investment category, therefore among the best sovereign signatures in the euro zone. However, on the markets, France has moved into another world since the dissolution.
A soaring risk premium
Permanent political instability, successive slippages on the budget – a hole of almost 100 billion euros over 2024 and 2025 compared to forecasts at the start of the year – and the inability of the political class to measure the extent of the problem have fueled strong tensions on French debt on the markets, with a peak this week, the day after an alarmist speech by Michel Barnier on the consequences of a vote of censure. The yield gap on French debt (at 10 years) with German debt even briefly rose to 90 basis points, the highest since 2012. According to analysts at Société Générale, a budget agreement remains the best option. more likely, 70%.
The gap between French and German borrowing rates at a record level
“Whatever the scenarios, we believe that the range of spreads (rate difference, editor's note) of French debt will remain much higher than during the pre-election period. Which confirms what we were already announcing, namely a change of regime for the French debt”, advances Ninon Bachet, rates strategist at Société Générale CIB.
For the next four quarters, the bank has even significantly revised upwards its OAT/Bund spread estimates, which measures the risk premium, of around ten basis points, to 70 basis points for the most optimistic (stable government in 2025) to 110 basis points for the most pessimistic scenario, namely the fall of the government and/or new elections.
Market stress
Today, this yield gap hovers around 80 basis points. It was in a range between 50 and 60 basis points a year earlier. As the government now repeatedly repeats, the cost of the French debt is now higher than that of Spain, Portugal, and even for a time, briefly, that of Greece. At these price levels, French debt is thus treated at levels which already correspond to a rating of one notch to two notches lower, in an investment category of “upper average quality”, called “simple A”, in the grid rating agencies.
Market stress is not so much due to the absence of a budget as to a lack of prospect of recovery of very degraded public finances. As summarized by an attentive observer of France's budgetary situation, “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, which almost amounts to denial” .
Another planet
As such, the parliamentary debates on the budget are surreal for market operators or investors. ” The deterioration of France's rating is already integrated by the markets. This is no longer the subject. The subject is that everything is going into a tailspin, that the markets are now convinced that there is no longer any recovery force for public finances, nor any prospects for 2025 and even less for 2026”alarms an influential economist, close to public authorities.
Deficit, taxes, pensions: the risks of a France without a budget
“I have the impression that politicians live on another planet. Or that they have a total lack of culture on the orders of magnitude at stake. We must still remind them that we are not going to finance the repeal of the pension reform by merging the planning commission with France Stratégies”annoys a manager, who was very worried about the repeal project, much more so than about the budget.
Beyond a certain threshold
Likewise, the five billion euros requested from local authorities do not even represent half of the slippage in local finances in 2024 alone! As for the effort proposed on exemptions from charges, it is almost irrelevant compared to the explosion of these same exemptions since 2021.
S&P Global's decision to maintain its opinion paradoxically risks being counterproductive. After successive downgrades, France had indeed managed to maintain its privileged status on the markets. This is less the case today but the temptation is always great, if not to triumph, at least to tell yourself that once again “it’s okay”.
Except that for investors, especially non-residents, there is always a principle of non-linearity: beyond a certain degree of acceptability, they sell. The net sales of French debt this summer by Japanese institutional investors, traditionally fond of OATs, was a first alert. “Our overall feeling on sovereign debt in the euro zone is that we remain defensive on France and that we think that the peripheral countries will once again behave better than the core countries of Europe,” recalls Ninon Bachet.
There will always be demand given the importance of French debt on the market. But will it be sufficient to absorb an issuance program of 300 billion euros over 2025. The first elements of answers will be expected when the Treasury bond auctions reopen in January.
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