“Political instability is likely to persist for some time to come. It would be legitimate for S&P to take note of this,” said Charles-Henri Colombier, economic director at Rexecode. In May, the American rating agency lowered the French rating by one notch, from “AA” to “AA-”, with a stable outlook, reducing the risks of a further downgrade in the immediate future. But “it would be surprising not to have any adverse action concerning France, with at least a change to a negative outlook,” says Norbert Gaillard, economist and independent consultant.
“Greek scenario”
Since the spring, “bad news” has accumulated in a France already heavily in debt, appearing among the European dunces, he notes: dissolution of the National Assembly, “delays” around the appointment of the Prime Minister and “ alarming revisions” of public deficit forecasts. In October, Moody's and Fitch maintained the French rating with a negative outlook. Norbert Gaillard mentions two other possible scenarios: a further deterioration of the rating or its placement under negative surveillance (“rating watch”) to signal “significant stress” likely to evolve quickly.
S&P would then grant France a short reprieve before adjusting its rating. “To make its decision, the agency would wait to see the vote on the budget, the budgetary and fiscal measures it contains, and whether the government stands or falls,” according to him. With a minority, Michel Barnier's government is advancing in a minefield. He wants to reduce the public deficit from 6.1% of GDP in 2024 to 5% in 2025, then below the European ceiling of 3% in 2029, a trajectory approved on Tuesday by Brussels.
At the end of bitter debates, he plans to use article 49.3 of the Constitution to have the Social Security and State budgets adopted without a vote as well as the budget execution for 2024, each time risking be overthrown by a motion of censure from the left, which the RN threatens to support. This possibility makes the markets tremble, with the government spokesperson even raising the specter of a “Greek-style scenario”. Reflecting these fears, the gap between French 10-year sovereign rates and those of Germany, considered a safe haven in Europe, reached its highest level since 2012 on Tuesday.
“Very worrying”
And if an outlook becoming negative would have little impact on France's borrowing costs, tensions would however be increased in the event of a downgrade of the rating, which would move to a lower category, considered less safe by major investors. “The management rules of many investment funds very strongly limit, or even prohibit, the holding of sovereign bonds rated less than AA or AAA,” explains Eric Dor, director of economic studies at the IESEG School of Management, in a note.
A relegation of France to category A “would therefore imply net sales of its bonds on the markets, and then a sharp drop in demand. This would automatically lead to an increase in the rate of return.” The governor of the Bank of France, François Villeroy de Galhau, warned on Tuesday that “confusion” over the budgetary trajectory “would have a cost on the borrowing of France and the French”.
