This week, S&P will announce its assessment of France’s public finances, a crucial moment for Prime Minister François Bayrou following his budgetary success in a divided National Assembly. Currently rated AA- by S&P, France faces potential downgrades due to modest fiscal improvements and reliance on temporary tax increases. Concerns also arise over rising debt and the commitment to reduce the public deficit to 3% of GDP by 2029, with heightened anticipation surrounding S&P’s decision.
Impending Rating Decision for France’s Public Finances
This Friday, the American credit rating agency S&P is set to announce its evaluation of the state of France’s public finances, potentially affecting the country’s sovereign rating. This marks a pivotal moment for Prime Minister François Bayrou’s government, as it is the first assessment since he successfully navigated the state budget and Social Security budget through the National Assembly, which has been politically fragmented since its dissolution by Emmanuel Macron on June 9. Notably, this was accomplished using article 49.3, without facing the censure that befell his predecessor, Michel Barnier.
Current Ratings and Economic Outlook
At present, S&P assigns France a rating of AA- with a “stable outlook,” indicating that a downgrade is unlikely in the near term. Moody’s holds a similar view, rating France Aa3 with a stable outlook, while Fitch also rates it AA-, albeit with a negative outlook. These ratings signify that France maintains a “high quality” credit status, akin to a 17/20 score. Should the rating be downgraded, it would fall into the “upper medium quality” category. According to economist Stéphane Colliac from BNP Paribas, investors are likely to continue purchasing French debt, especially given the diversified nature of the economy and the current non-alarming market conditions.
Éric Dor, the director of economic studies at IESEG School of Management, suggests that S&P might opt to maintain its current rating. However, he believes that a shift to a negative outlook could be warranted. Dor points out that despite the adoption of the budget, there has been minimal improvement in French public finances since S&P’s last rating on November 29. He emphasizes that the agency’s assessment of the public deficit is not promising, noting that the projected shift from a deficit of 6% to 5.4% of GDP this year represents minimal progress.
Furthermore, the anticipated budget improvements are heavily reliant on tax hikes, many of which are labeled as temporary, such as the corporate tax surcharge for large companies, which is set for just one year. Dor argues that this approach merely postpones necessary structural reforms to future years. On the growth front, S&P had previously forecasted a 1% growth rate for 2025, while the government’s expectation stands at 0.9%, a figure that is optimistic yet “achievable,” according to Colliac.
Colliac believes that the Bayrou government’s budgetary decisions, which are more focused on state finances compared to those of Michel Barnier, provide a sense of “more control.” However, he expresses concern about the escalating debt, which reached 3,303 billion euros by the end of the third quarter, and the accompanying interest burden that BNP Paribas estimates will soon approach 3% of GDP.
Moreover, the government has made a commitment to the European Union to decrease the public deficit to 3% of GDP by 2029. Should the interest burden surge, it will be essential to balance public accounts while excluding debt service, a task that Colliac describes as “complicated.” The decision from S&P is highly anticipated, with one minister admitting that there is a sense of anxiety surrounding the outcome. Regardless, Minister of Economy Éric Lombard has urged his colleagues to ensure that their budgetary trajectories do not jeopardize the target of maintaining a public deficit at 5.4% of GDP by year-end.