Having barely presented the finance bill for 2025, the Barnier government is facing a first test this Friday evening. Fitch will communicate, after Wall Street closes, its updated opinion on France’s capacity to honor its debt. The American agency carried out a downgrade in April 2023, assigning an AA- rating to French bonds, with a stable outlook. It is possible that she will stick to this position. However, given the drift in public finances – the deficit could reach 6.1% in 2024, compared to an estimate of 4.4% last January – a move to a “negative outlook” would not seem “undeserved”, he wrote. a few days ago the Oddo BHF firm.
The experts interviewed by L’Express are more pessimistic regarding Moody’s decision, expected on October 25. This currently attributes a rating of Aa2 to French debt, the equivalent of one notch higher than AA- from Fitch, but also from Standard & Poor’s. Even if the associated outlook is so far “stable”, its next announcement could be an opportunity to align downwards, to Aa3. “A fortiori if the budget has difficulty passing!”, notes Léa Dauphas, at TAC Economics, who envisages that the two other agencies will revise their outlook to “negative” during 2025.
This Friday morning, the Minister of the Economy Antoine Armand admitted on France 2, the executive took into account, in the development of the 2025 budget, the “attentive look” of the rating agencies. Whatever happens, a deterioration would only be the result of a situation well known to investors. “France remains a very good signature, recent Treasury issues prove it, even if the cost of our credit has increased a little,” we want to believe Matignon. This is nothing trivial : our country will raise a record amount of 300 billion euros in 2025, after 285 billion in 2024, Agence France Trésor calculated yesterday.
“More worried about France than Italy”
Our lenders seem, for the moment, to give the benefit of the doubt to the Barnier government, but “they are not letting down their guard”, underlines Vincent Juvyns, strategist at JP Morgan. As evidenced by a “spread” [NDLR : écart de taux] with Germany, whose debt is considered risk-free, which remains in the zone of 75 – 80 basis points, at annual highs. A tighter level than the usual range of 40 to 50 basis points. Clearly, the markets demand a higher return for a “France” investment which they consider more risky. “Concern about public finances increased at the time of the elections in June. But this question is not new. France has a history of high public deficits and especially significant primary deficits [NDLR : hors charges d’intérêt]. For a debt to be sustainable, you must be able to generate a primary surplus, which is no longer the case in France since 2008”, points out Jean-François Ouvrard, economist at Morgan Stanley. In a large French bank, an economist confides that he is “more worried about France than about Italy”. However, this expert does not foresee a “risk of a major economic policy error”, like Liz Truss in Great Britain or Matteo Salvini in Italy. have been able to commit. In short, nothing likely to propel the France/Germany spread to 150 basis points.
To the ears of the markets, the proactive speech of Michel Barnier and Bercy rings true. “We left Bruno Le Maire with an ambition to reduce spending by 20 to 30 billion euros. Today, we feel that the government wanted to be more ambitious, these 60 billion would be an unprecedented budgetary adjustment,” recognizes Vincent Juvyns. “There will be a real reduction in the deficit in 2025, hopes Jean-François Ouvrard. This is what the markets are waiting for, frank direction. It is not a question of returning to 3% straight away, but of declining a strategy that gives confidence.” The mission is, a priori, not impossible. Other countries have gone through a similar, or even more severe, austerity course, like Portugal, Spain and Ireland. “It’s a difficult moment to go through but the economy is emerging from it solidified. We must agree to step back in order to jump forward better by accepting concessions,” believes Vincent Juvyns.
Morgan Stanley analysts looked back at the data from 2012 to 2019. A phase during which France managed to reduce its public deficit from 5.2% to 2.4%. “It started with fairly strong tax increases in 2012-2013, then with spending savings measures,” recalls the American bank economist. One parameter prevents us from pushing the comparison too far: the increase in interest rates, which has occurred since 2022. Its impact in the public accounts is certainly progressive, as bonds are repaid, replaced by other issues of securities at a higher rate. pupil. But the financial burdens weigh more and more heavily. In 2025, the repayment of interest alone will cost nearly 55 billion euros, 4 billion more than in 2024. This expenditure item alone is not very far from the total savings targeted by Michel Barnier and its allies to reduce the public deficit to 5% next year…
Discussions around the budget are expected to last several weeks. A source of volatility which could increase pressure on rates. In the meantime, a French banker reports that international investors have started to review their allocations. The Japanese, historically fond of French debt, would increase their positions in Spain, Portugal and Italy. To the detriment of France.
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