France’s Sovereign Debt: S&P’s Stance adn Fiscal Challenges
France faces continued scrutiny over its public finances as the American S&P rating agency deliberates on the nation’s sovereign debt. Despite little change as its last review in Febuary, when S&P lowered its viewpoint, the agency’s upcoming decision carries significant weight.
S&P’s February Warning
On Feb. 28, S&P assigned a negative outlook too France’s AA- rating, which denotes good quality
credit. This negative perspective signaled a potential downgrade if ample improvements are not made. the agency cited public finances as being under pressure
and expressed concerns about a budget strategy beyond 2025 uncertain.
Government’s Fiscal Tightrope
Prime Minister François Bayrou is tasked wiht identifying €40 billion in savings for the upcoming year across state, social security, and local community budgets. He has indicated that an effort to all French people
will be required, even suggesting a possible increase in VAT to fund social spending, a measure dubbed the Social VAT.
However, the specific measures to achieve fiscal balance remain undefined. Mr. Bayrou admitted before the Senate that none of the measures
that will compose the government’s plan for returning to balanced public finances,expected before July 14,
have been finalized.
The government is consulting with social partners and political parties to avoid parliamentary setbacks. This collaborative approach introduces uncertainty regarding the strength of the measures to be presented with the budget by the end of September.
Auditors’ Concerns and Government Response
The Court of Auditors has cautioned about a potential liquidity crisis
for Social Security next year, attributing it to out of control
spending. minister of Public Accounts Amélie de montchalin surprised observers by firmly setting a goal to balance social security by 2029.
This target is ambitious, considering the government’s own projections in the 2025 Social Security budget anticipate a deficit of €24.1 billion in 2028, the last year for which forecasts are available.
European Commission’s Projections
The European Commission’s revised economic projections,released May 19,forecast that France will have the eurozone’s largest public deficits in 2025 and 2026,at 5.6% and 5.7% of GDP, respectively. These figures contrast with the government’s more optimistic projections of 5.4% in 2025 and 4.6% in 2026, with a return to within 3% by 2029.
Eric Dor, director of economic studies at the IESEG School of Management, notes that these projections show the extreme insufficiency of the measures already voted to clean up public finances.
He also points out that the annual interest burden on France’s debt, which is 113% of GDP, is almost out of control
and now represents 5.6% of tax revenues in 2025, compared to 2% in the Netherlands and 2.7% in Germany-both countries with AAA ratings.
Rating Agency’s Dilemma
The central question is whether S&P will trust the government’s promises, despite their vagueness and long-term nature, or if it will proceed with a downgrade. A downgrade would place France in the AC category (upper average quality), which is annoying because many funds and institutional investors have strict rules and favor double AA, and this could cause increased rates
for France’s funding, according to Mr. Dor.
Mr. Dor believes S&P will likely choose to leave time
for France, awaiting the outcome of pension discussions and the budget presentation.
Charlotte de Montpellier, an economist at ING, shares this sentiment: I don’t think they will degrade. They will wait to see what will happen with budgetary discussions for 2026, with this desire to save money.
Fitch, another rating agency, also classifies France as AA- with a negative outlook but confirmed its rating during its last review in mid-March.
Moody’s downgraded France by one notch in December, classifying it as AA3, equivalent to AA-, but with a stable outlook.This rating was not updated during its April review.
FAQ: france’s Sovereign Debt
- What is a sovereign debt rating? A sovereign debt rating is an assessment of a country’s creditworthiness, influencing its borrowing costs.
- Why is France’s rating vital? It affects investor confidence and the interest rates France pays on its debt.
- What could trigger a downgrade? Failure to address fiscal imbalances and meet deficit reduction targets.
- What are the potential consequences of a downgrade? Higher borrowing costs, reduced investor confidence, and potential economic instability.
