With a debt exceeding 3,000 billion and a deficit of 5.5% of GDP in 2023, the executive is suspended from the verdict of the rating agencies. Fitch and Moody’s will announce on Friday April 26 whether or not they downgrade France’s sovereign debt rating. For Xavier Timbeau, economist, director of the French Observatory of Economic Conditions (OFCE), it is difficult to say whether the French rating will be downgraded or not this evening.
“The rating agencies are not going to take the risk of making a very negative judgment, when everyone seems to be saying that there is no problem today”declares Xavier Timbeau, on franceinfo, Friday April 26. “Afterwards, the government’s communication was considered quite unclear, it did not give a feeling of having a good grasp of its budgetary strategy”, concedes the economist. One thing is certain, according to him, they “are not going to tell us things that we don’t already know. In fact, everything is on the table, everything is transparent”.
franceinfo: Today, what are France’s ratings and what do they say about our country and its situation?
Xavier Timbeau : Each agency has its own scale. But let’s say that France’s score is in what we call the “high grade”, that means very good quality. There is a notch above which is still prime grade and that is triple A. And France has lost it for some time now. So we are in the “very good grade” zone, but there are better. So if you want, it’s a 17 or a 17.5/20.
So we are still on a very good note.
We are on a very good note, we are on very good quality. And that is still important, because what it says is that if you invest in French public debt, in fact you are buying something safe. So what does that mean? This means that there will be no default on this debt. I remind you that the last time France defaulted on its debt was in 1797. So it was a very, very long time ago. So there is no default, there will be no partial default and therefore you can put your money there with complete confidence, even if the associated remuneration is rather low. That’s the advantage of having a good quality security, is that it doesn’t cost much to borrow and it doesn’t yield much when you invest your money in it.
We don’t have a crystal ball, but does that mean we can expect that the French rating will not be downgraded this evening? ?
So, it’s hard to say. In addition, agencies carefully maintain their communication from this point of view. The rating of countries, we must see that for these rating agencies, it is a sort of showcase and a way to get people talking about them. It’s done for free, so no one pays for it.
“The job of rating agencies is to rate all financial securities in the private sector, and this is a way for us to know that they exist.”
Xavier Timbeau, economist and director of the OFCEfranceinfo
And so the more we talk about them, the happier they are. So they will probably not degrade France because France is in a rather solid situation. The financial markets lend to France at a rate which has not changed despite the bad economic news, the bad economic news. We could say yes, but that must necessarily lower the rating.
Because there was the debt which exceeded 3,000 billion, the deficit which reached 5.5% of GDP in 2023. But you say no, that does not necessarily lead to deterioration, it is not automatic.
This is bad news. But the question is not to know when there is bad news, hop, it results in a downgrade of the rating, it is to know does this bad news lead to an increase in the risk of default from France ? And there, it’s difficult to have a reasoning that would justify that. This is seen in particular because, on the financial markets, the interest rates charged for France have not increased, the gap with Germany is small. And so, the rating agencies are not going to take the risk of making a very negative judgment, when everyone seems to be saying that there is no problem today.
Afterwards, the government’s communication was considered quite unclear, it did not give a feeling of having a good grasp of its budgetary strategy. The fact of not respecting the budgetary procedure in the absence of a corrective finance law and the use of decrees to redo the famous 10 billion then 20 billion savings in 2024. All of these are elements which show that There is a small risk of a lack of political consensus, and that there could therefore be an opposition, a vote of no confidence or in the next elections, a change of majority. These are factors of instability that the rating agencies can weigh.
“So maybe they will have a slightly negative judgment by not changing the rating, but by putting a negative perspective on this rating.”
Xavier Timbeau, economist and director of the OFCEfranceinfo
What impact does this have, concretely, for us?
Concretely, for us, it doesn’t have much impact. You still have to be aware of it. In fact, people who invest, professional investors who are large banks, pension funds and who have very large portfolios, are looking for safe assets. They try to buy German debt securities and when there are no German debt securities, they buy French debt securities. And they inform themselves, they know, they follow. The analysis carried out by the rating agency. It is not very important for them because in fact they are capable of doing their analyzes themselves. There are plenty of free materials available everywhere.
You can also ask the government or Agence France Trésor. There is a lot of communication around this. So in fact, the rating agency doesn’t contribute much to all that. Which means that when she says something, she transcribes the general consensus more than she provides real information. When it rates private securities, Renault wants to issue debt for example, it will request a rating from the rating agency. She is paid by Renault and she will look in detail. She will run simulations, she will look at the legal aspects, she will look at the economic aspects, she will compare with other companies. There is real analysis work being done. And that, this analysis work, yes, can change things in Renault’s situation. But for a sovereign country…
Do agencies influence each other? There are two who are making their decisions this evening, the third is arriving a little later, at the end of May, are we looking at what the other is doing?
Yes, of course, they look at each other. There can be a little game of trying to catch some light between them. At the same time, behind it, there is their reputation for seriousness which is engaged, so they cannot say things which are too dissonant either. But yes, there may be at some point a movement that takes place with an agency that will say ‘here, I’m going to move away from the consensus a little and I’m going to say what everyone thinks, but that no one says’.
So it can have a little cathartic effect in fact for a rating agency. Because it is still, among the actors who give their opinion on this subject, one of those who have the most media coverage and therefore, because of that, they have a weight which can be significant. But we really shouldn’t expect a surprise, they’re not going to tell us things we don’t already know. In fact, everything is on the table, everything is transparent.
And a rating remains an opinion.
A rating remains an opinion. This is solely the responsibility of this rating agency. Afterwards, we still know that a deterioration, if it were to occur, would still have a fairly strong impact on the political debate. In addition, in a pre-electoral period, we will soon have the European campaign and there, perhaps that can also be an argument to say the agencies will be careful because behind them, there are also their relations with the government. There is the government’s relationship with investors. Maybe in an election period, we don’t play too much with fire. But hey, we’ll see.