France’s credit rating cut due to higher budget deficits than expected 

Standard & Poor has announced that it has now downgraded France’s sovereign debt rating, delivering a huge blow to the government just days before the EU parliamentary elections. 

The rating was cut from “AA” to “AA-”, with S&P citing expectations of higher deficits than it had expected that would increase the debt burden in the euro zone’s second-largest economy.

The threat of a downgrade has been looming since the government sharply revised its budget deficit estimates upward in April, following weaker-than-expected tax revenue for 2023. The government now aims to reduce its public sector budget deficit from 5.1% of GDP this year to 4.1% next year, with a goal of bringing the fiscal shortfall down to the EU ceiling of 3% by 2027.

However, these estimates depend on implementing tens of billions of euros in budget savings, which institutions like the International Monetary Fund and the national fiscal watchdog have indicated need to be clearly detailed to be credible.

Despite expecting an economic pick-up and recent reforms to aid in deficit reduction, S&P projects the fiscal shortfall will remain above 3% in 2027.

This downgrade makes S&P the second of the three major ratings agencies to lower its view on French debt within a year, following Fitch’s downgrade to AA- in April 2023. 

The timing is particularly challenging for French President Emmanuel Macron, whose government is struggling to close the gap with the far right in the upcoming European Union parliamentary elections on June 9.

S&P explained the downgrade by stating, “The downgrade reflects our projection that, contrary to our previous expectations, France’s general government debt as a share of GDP will increase due to larger-than-expected budget deficits over 2023-2027.” 

The political repercussions are likely to be severe, providing opposition parties with ammunition to criticise the government, which had maintained a strong economic record until the recent deficit overshoot.

“We believe political fragmentation adds to uncertainty regarding the government’s ability to continue implementing policies that increase economic growth potential and address budgetary imbalances,” S&P added.

Finance Minister Bruno Le Maire said that the downgrade would not weaken his determination to improve France’s public finances after blaming the fiscal deterioration on the costs of the COVID-19 pandemic crisis.