The Fitch rating agency maintained France’s rating on Friday, but placed it under “negative outlook”, the day after the presentation of the 2025 draft budget which provides for an effort of “60 billion euros” according to the government to contain the soaring public deficit. The Minister of Economy and Finance, Antoine Armand, reacted immediately, saying he “takes note” of Fitch’s decision. He added, however, that “the agency highlights the strength of our large and diverse economy, the effectiveness of our institutions and our history of macro-financial stability.”
Fitch still grants an “AA-” to France, the equivalent of a 17/20 (i.e. a 17 on a scale of 20 rating levels). But the agency gives it a “negative outlook”, which means that it plans to downgrade this rating in the future. “Fiscal policy risks have increased since our last review,” explains Fitch, whose previous rating on France dates back to April.
“This year’s expected budget slippage places France in a more unfavorable situation, and we now expect larger budget deficits, which will lead to a sharp increase in public debt to reach 118.5% of GDP by 2028,” she wrote in her press release. And while the government intends to reduce the French public deficit to 5% of GDP from 2025, then below 3% in 2029, the Fitch agency does not believe it: it has raised its public deficit forecasts for France in 2025 and 2026 “at 5.4% of GDP”.
“We do not expect the government to meet its revised medium-term deficit forecast to bring the deficit below 3% of GDP by 2029,” the agency explains. “Strong political fragmentation and a minority government complicate France’s ability to implement sustainable budgetary consolidation policies,” she underlines.
2024, “black” year
France made brutal revisions to its deficit forecast for 2024, going from 4.4% at the end of 2023 to 5.1% in April then 6.1% of GDP in the draft budget. It “is an exception” in the euro zone, analyzes the research firm Oxford Economics. And the country “has little chance of significantly reducing its deficit in the coming years”, where most of its neighbors are more rigorous, he underlines. Spain, for example, plans to post a public deficit of 2.5% of GDP next year and Italy of 3.3%.
To prove its will and avoid a risk of “financial crisis” in the words of Prime Minister Michel Barnier, the government presented on Thursday a draft budget for 2025 which provides for “60 billion euros” of efforts in the form of reductions in spending and tax increases in order to reduce the public deficit to 5%. Of “relatively unprecedented” scale, according to the president of the High Council of Public Finances (HCFP) Pierre Moscovici, who analyzed its macroeconomic contours, this potion mixing tax increases and spending cuts could put France back on track. slippery after a year 2024 described as “black” on Thursday. But it also risks, according to him, weighing on growth next year, currently forecast at 1.1% by the government, and complicating the reduction of deficits in the future.
Demotion coming?
In June, France suffered a downgrade of its sovereign rating by S&P, going from the third notch “AA” to the fourth “AA-“. This was the first decline since 2013 by this rating agency. A downgrade generally has the effect of increasing bond borrowing rates. The ten-year OAT rate, a benchmark for international comparisons, is already higher for France than that of Spain and Portugal, countries previously known to spend more.
This increase in prices increases the debt burden, today the second largest French budget item, all the more worrying since Paris announced on Thursday a record program of 300 billion euros of borrowing on the markets next year. After Fitch, the rating agency Moody’s, which ranks France a notch above its peers, will give its diagnosis on the French economy on October 25, before S&P Global on November 29.