The downgrading of France’s rating by the Moody’s rating agency could pave the way for other rating downgrades by other agencies, some investors believe.
The level of difference between France’s bond yields and Germany’s (“spread”) should however not change too much in the short term, provided that the political situation and the vote on a budget take place quickly.
After the rating agency Moody’s downgraded France’s rating by one notch, to Aa3, with a stable outlook following the appointment of François Bayrou as Prime Minister, the 10-year yield on bonds issued by the French State progressed slightly, from 3.01% on December 13 to 3.06% this Wednesday, December 18.
The rate difference or “spread” between French and German debt, which was 0.77% on Friday December 13, reached 0.80% (or 80 basis points) on Wednesday December 18.
An increase in the spread means that investors consider French debt to be riskier than German debt. It helps to lower the value of bonds held by investors.
The deterioration of France “is obviously not good news, and this makes the downgrade by Fitch (review planned for the end of April 2025) even more likely”, estimates Marie-Anne Allier, manager within the rates team at Carmignac Management.
“Despite everything, and for the moment, the yield gap with Germany reacts little (+1 to 2 bps for the moment), with the markets already treating France as an A-/BBB+ country,” observes the manager. DBRS gives France an “AA-high” rating, while S&P and Fitch give it an “AA-” rating, according to the Ministry of Finance website.
“At this stage, we believe that the interest rate gap between France and Germany should remain high, close to the current level,” observed Sebastian Paris Horvitz, director of research at LBPAM, recently. Thus “for a 10-year maturity the rate should remain between 75-80 basis points (bp)”, he observed.
Bernd Volk, credit strategist at Deutsche Bank, in a note published on Monday December 16, was more measured on the risk of further deterioration in the immediate future.
“The Aa2 rating for France was considered outdated by most investors. Unexpected rating downgrades have been rare in recent years, and send a signal of urgency,” he said. “The end result is more market-friendly than expected, as the downgrade was already in the price and the stable outlook likely reduces the chances of other imminent reductions,” he adds.
Since the start of the year, the Paris Stock Exchange has fallen by 1.8% (excluding dividends). Political uncertainty and the debates around the budget initiated since last September have contributed to this drop.
Following Moody’s announcement, the resigning finance minister, Antoine Armand, declared “taking note” of the decision on social networks.
This news comes as France is still without a budget for next year, and still does not have a government to determine one that can be voted on in Parliament.
The Prime Minister must now form a government that can benefit from the support of the legislative texts that he will propose to Parliament, where no majority exists.
The priority and main issue of future debates will be the adoption of a budget for the year 2025.
The previous government hoped to reduce France’s public deficit from 6.1% in 2024 to 5% in 2025 and to return below 3% in 2029. Shortly after their announcement, these objectives were considered difficult to achieve.
A State still without a budget
For the first time in 45 years, France will end the year without a budget for the following year, having only a special law presented on December 11. This law provides for three things: “authorize the collection of existing taxes”, with the renewal of revenues mentioned in the organic finance law, and authorize the State as well as “several social security organizations” to borrow on the markets.
The credits made available to public administrations at the start of next year will therefore not be able to exceed the amounts voted for 2024. This means that no new expenditure will be implemented. Investments already in progress and projects responding to an “urgent and proven” need should nevertheless be financed.
The absence of a finance law for 2025 could nevertheless have a consequence. Due to a lack of budget, the tax scale will not be adjusted for inflation, which risks mechanically leading millions of tax households to pay a little more tax, in a context where their purchasing power is not. is not sure to progress as quickly.
According to the newspaper Le Monde, Eric Coquerel (LFI), president of the Finance Commission at the National Assembly, plans to table an amendment to the special law to “correct” this state of affairs.
The other short-term consequence is that the new taxes provided for by the previous 2025 finance law will not come into force immediately. However, the same goes for stopping certain tax increases.
The stakes for the public deficit and debt
The problem is that in the absence of a vote and then rapid implementation of a budget which effectively aims to reduce the public deficit, the objective of 5% deficit targeted by the late Barnier government will become increasingly difficult. to achieve with each passing day.
This means that public debt will continue to increase, and could ultimately lead France’s spread to begin to test the highest levels already reached this year.
During a recent hearing before a commission of inquiry into the slippage of deficits this year, the former Minister of the Economy, Bruno Le Maire, feared that France would be “strangled by the noose of interest rates “.
A forecast for which the former financier of France and the governments of which he was a part seem to be partly responsible.
“France’s political stability and its ability to raise taxes have enabled the country to maintain a higher rating for a long time than the trajectory of the deficits deserved,” notes Marie-Anne Allier at Carmignac Gestion.
“Losing political stability risks precipitating rating downgrades. We are no longer very far (in spread) from Italy and we are starting to imitate their political instability. »
© Morningstar, 2024 – The information contained herein is for educational purposes and provided for informational purposes ONLY. It is not intended and should not be considered as an invitation or encouragement to buy or sell the securities mentioned. Any comments are the opinion of the author and should not be considered a personalized recommendation. The information in this document should not be the sole source for making an investment decision. Be sure to contact a financial advisor or financial professional before making any investment decisions.
The author(s) have no ownership interest in any securities mentioned in this article. Learn more about Morningstar’s editorial policies.
Related News :