Downgrade to French credit rating stings Macron government

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France has been downgraded by S&P Global in a blow to Emmanuel Macron’s credibility as a steward of the economy, once the bright spot of his presidency.

The credit rating agency changed France’s long-term issuer rating from AA to AA- with a stable outlook, citing concerns that the trajectory of government debt as a share of gross domestic product would increase through 2027 and not fall as previously forecast. 

S&P also said France’s lower-than-expected growth was a factor. It expressed concern that “political fragmentation” would make enacting reforms to boost growth or “address budgetary imbalances” difficult for Macron’s government.

The downgrade risks precipitating significant political fallout for Macron, but the financial impact is likely to be limited as was the case the last time significant downgrades were made in the aftermath of the Eurozone crisis roughly a decade ago.

The bad news on public finances comes as Macron’s centrist alliance is poised for a broad defeat in European elections on June 9. Polls show it 17.5 points behind Marine Le Pen’s far-right Rassemblement national party, according to Ipsos. Opposition parties are gearing up to debate two no-confidence motions on Monday to object to the government’s handling of the budget, although at this stage they have little chance of passing. 

Macron no longer boasts a parliamentary majority so he has more difficulty in passing legislation or a budget, although the French constitution allows the government to override lawmakers on budget matters.

“The downgrade by S&P is legitimate because, of all the countries in the Eurozone, only two are left with such high debt-to-GDP ratios that are only getting worse — France and Italy,” said Charles-Henri Colombier, a director at Rexecode economic institute. “It is a warning to the government that it needs to do more to cut spending, not just seek to boost growth.”

The government has been bracing for a downgrade since it revealed in January that its deficit was wider than expected last year, at 5.5 per cent of GDP compared to a forecast of 4.9 per cent. 

While deficits are typical in a country that has not balanced its budget in decades, the Eurozone’s second-largest economy suffered an unforeseen shortfall of €21bn in tax revenue in 2023.  

The situation has shown the limits of Macron’s strategy since he was first elected in 2017 — to cut taxes on companies and enact business-friendly reforms in a bet that such moves would boost growth enough to pay for France’s generous social welfare model.

While unemployment has fallen to its lowest levels in decades and foreign investment has risen, the government has continued to spend heavily on public services, as well as on exceptional measures to protect businesses and households from the fallout of the pandemic and the energy crisis.

That has widened the deficit and led to the national debt ballooning.

When interest rates were low repercussions were few, but borrowing costs have ticked up from €29bn in 2020 to above €50bn this year — more than the annual defence budget. They are set to reach €80bn in 2027.

France says it still aims to bring its deficit back to 3 per cent of output, an EU threshold, by 2027, the end of Macron’s second term. However, economists see that as highly unlikely and S&P’s new forecast is for the deficit-to-GDP ratio to stand at 3.5 per cent in 2027. 

“We believe the French economy and public finances overall will continue to benefit from structural reforms implemented over the past decade,” said S&P. “However, without additional budget-deficit-reducing measures . . . the reforms will not be sufficient for the country to meet its budgetary targets.” 

General government debt as a share of GDP “will continuously increase” to 112.1 per cent of GDP in 2027, from 109 per cent last year. 

Macron’s finance minister Bruno Le Maire has been scrambling to find savings on everything from climate policies to subsidies for hiring apprentices so as to cut a further €10bn this year, after reductions of €10bn in January.

At least another €20bn in cuts will be needed next year, according to the budget ministry, but the risk is that these will dent growth.

The government has also insisted it will not raise taxes on households or companies, a hallmark of Macron’s economic policy. Opposition parties have criticised the stance as unrealistic given the hole in the budget.

The government is forecasting growth of 1 per cent this year, higher than the Bank of France’s 0.8 per cent prediction.

Experts have said the S&P downgrade is not expected to have a big effect on French borrowing costs because investors still see the country as a reliable entity. The spread between German and French 10-year bonds has even slightly narrowed this year.

“Our debt easily finds buyers on the market,” Le Maire told Le Parisien newspaper after the downgrade. “France still has a high-quality reputation as an issuer, one of the best in the world.”