Standard & Poor’s on Friday downgraded France’s credit rating for the first time since 2013, citing compliance with the country’s fiscal position.
Credit rating agency Standard & Poor’s on Friday downgraded France’s credit rating for the first time since 2013, citing the country’s deteriorating fiscal position.
S&P justified its decision to downgrade the EU’s second-largest economy to “AA-” from “AA,” saying the budget deficit is expected to remain above three per cent of GDP in 2027.
The agency said that at 5.5 per cent of GDP, the French budget deficit in 2023 was “significantly higher than we previously forecast.” France’s public debt will rise to about 112 per cent of GDP by 2027 from about 109 per cent in 2023.
French Economy Minister Bruno Le Maire reiterated the government’s aim to reduce the public deficit to below three per cent of GDP in 2027, according to Le Parisien.
I have to tell you, in reality the main reason for this downgrade is that we saved the French economy. (…) This essential spending has obviously increased our debt, but also allowed us to save our businesses and jobs.
The rating agency expressed doubts about the ability of Emmanuel Macron’s government to carry out further reforms without an absolute majority in parliament.
“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 wrote.
A credit downgrade risks alienating investors and making it harder to repay debt. But the budget deficit will remain above 3 per cent of gross domestic product in 2027, according to the agency.
Seven-year anniversary as economy minister
The ranking decision came a day after Le Maire celebrated his record seven-year tenure at the economy ministry, according to POLITICO. After years of heavy spending to deal with economic crises caused by the pandemic, high energy prices and the conflict in Ukraine, France is now tightening its belt. In April, Le Maire’s ministry announced €10 billion in spending cuts for the second time this year.
The cuts were not enough to meet the government’s deficit reduction target for this year. Paris had to revise this from the original target of 4.4 per cent of GDP to a more realistic 5.1 per cent.
The government is looking for at least €20 billion in additional cuts for next year, aimed at social spending such as unemployment benefits and healthcare costs. Earlier, Prime Minister Gabriel Attal proposed reducing the period during which the unemployed can receive unemployment benefits.
Three Baltic states downgraded
The rating agency in addition to France on Friday downgraded the ratings of three Baltic states, Estonia, Latvia and Lithuania, citing the impact of the war in Ukraine and geopolitical risks with Russia.
Estonia’s sovereign debt rating was upgraded from “AA-” to “A+” and Latvia’s rating was raised from “A+” to “A,” as was Lithuania’s, all of which have a stable outlook.
According to S&P, the downgrades reflect “our view that the impact of the war in Ukraine and the wider regional geopolitical risks” will affect the Baltic region’s “economic growth, public finances, and competitiveness over the medium term.”
The rising inflation that has plagued the European Union since the Covid-19 pandemic and the conflict in Ukraine have had the most negative impact on the economy. Inflation in the EU has peaked at around nine per cent and has exceeded 20 per cent in the Baltic states, which are more dependent on energy from Russia. Gas and oil prices are at the heart of the issue.
The agency warned that the Baltic states have also increased their military spending. This will inevitably put pressure on public finances in a recession or weak growth, the agency warned.
