On Friday, September 12th, international credit agency Fitch lowered their credit rating for France. Although fact-based and analytical in its tone, their report is nevertheless a scathing indictment of the French government—all of it—for its gross mismanagement of the economy.
On the list of factors contributing to the downgrade, we find several that President Macron and the National Assembly could have addressed a long time ago but chose not to. Highest on the list is France’s high and rising debt ratio. Fitch comments:
France’s general government debt ratio will continue to rise, reflecting persistent primary fiscal deficits. Fitch projects debt to increase to 121% of GDP in 2027 from 113.2% in 2024, without a clear horizon for debt stabilisation in subsequent years.
Then the Fitch report makes a chilling point, one that should set off alarm bells left and right for the French government. Although France was not exactly a wonder of fiscal responsibility when President Macron took office in 2017, on his watch, the debt problem has grown from manageable to alarming:
France’s 2024 debt ratio, already double the ‘A’ category median, was 15 pp above its 2019 level and is now the third highest among sovereigns in the ‘A’ and ‘AA’ rating categories.
In other words, the French debt is higher than what is normal for its credit rating, even after the downgrade. This means only one thing: more downgrades are coming.
Adding insult to injury, Fitch also reminds us that
France has a weak record of fiscal consolidation and compliance with EU fiscal rules. There have been past periods of fiscal tightening, but the headline fiscal deficit has exceeded 3% of GDP in all but three of the past 20 years, and there has not been a primary fiscal surplus since 2001.
The future looks no better. According to Fitch’s own forecast, the consolidated French budget deficit “will remain above 5.0% of GDP in 2026-2027.” This forecast is based on the assumption that the French government implements annual fiscal-tightening measures, i.e., spending cuts and tax hikes, equal to 0.5% (not counting rising interest and defense costs).
Here is where things start to unravel for France. The nation’s current political turmoil is fueled in large part by vehement disagreements over how to address the budget deficit—if at all. Prime ministers come and go at breakneck speed, all facing one increasingly insurmountable challenge: to get the national parliament to unite on even the acknowledgment that the country is facing a fiscal crisis of structural, even existential, proportions.
This high level of political instability is not only a far cry from the political stability that characterized France in the 1980s and 1990s. It is also a very serious signal of systemic legislative ineptitude. Fitch emphasizes this, ranking the nation’s weak political leadership the second most important factor behind the credit downgrade:
The government’s defeat in a confidence vote illustrates the increased fragmentation and polarisation of domestic politics. Since the snap legislative elections in mid-2024, France has had three different governments. This instability weakens the political system’s capacity to deliver substantial fiscal consolidation
As the 2027 presidential election draws closer, Fitch explains, it “will further limit the scope” in French politics for any solid measures to address the fiscal crisis.
The Fitch downgrade is the third hit this year to the credit rating of President Macron’s government. The first came on February 28th when Standard & Poor’s, S&P, changed their outlook on France from “AA- Stable” to “AA- Negative.” On March 21st, DBRS Morningstar changed its outlook from “AA (high) Stable” to “AA (high) Negative.”
Technically, a lowering of the outlook—the stable/negative moniker—is less serious than a reduction of the credit score itself. However, earning a negative outlook from two credit rating agencies within a window of two months is a major warning signal. Short of a political miracle, I would expect downgrades by two of S&P, Moody’s, and DBRS Morningstar before the end of this year.
As an emphasis of how serious the French situation is, TradingEconomics.com notes that the rating that France now holds with Fitch is “the lowest on record from a major credit rating agency.” Add this to Fitch’s point about the French debt being higher than normal even for its new, lower credit rating, and the outlook on the future turns grim very fast. Echoes of recent history make themselves heard. In the Great Recession, Europe’s last ‘real’ economic crisis (the one during the pandemic was politically generated), France was hit by a series of rapid-fire downgrades.
From my book The Rise of Big Government, p. 108:
France lost its AAA rating with Standard & Poor’s in January 2012. In November that year Moody’s downgraded France, followed by Fitch in July of 2013 and yet another downgrade by S&P in November 2013.
I also noted that in the two years leading up to these downgrades, “the French government borrowed €341 billion”—an exceptional amount at that time. Rapid fiscal deterioration led to credit downgrades; those downgrades in turn raised the government’s borrowing cost to a point where that rising cost was more or less nullifying any efforts to reduce the massive budget deficit.
France was not alone in that downward spiral of lower credit scores, higher interest rates, and fiscal austerity. Several other European countries went through the exact same process, some with less ferocity, while others were in really bad shape (Greece, Portugal, Spain, and Italy). The outcome for the entire continent could have been catastrophic, but thanks to the intervention of the European Central Bank, the storm of the crisis eventually abated.
We are seeing strong signs of a similar scenario about to unfold across Europe, and once again, France is at the center of it. According to CNBC, the effect on interest rates has already made itself heard:
France’s borrowing costs ticked up on Monday as traders reacted to Fitch’s decision on Friday to downgrade the country’s credit rating … On Monday morning, the yield on France’s benchmark 10-year government bond initially moved 7 basis points higher … whereas the yield on the 30-year bond … rose 8 basis points.
There was a market counter-reaction later in the day; for now, France does not have to deal with any avalanche of rising debt costs. But let us also remember that this market reaction comes in the wake of only one credit downgrade. If the pattern from 2012-2013 repeats itself, there will be many more increases in the borrowing cost in the near future, and they will be without mitigating counter-reactions.
As other countries see their credit ratings fall and their borrowing costs tick up, the similarities to the last crisis will grow stronger.
However, there will be one decisive difference. Back then, the ECB could step in with virtually unending credit in the form of newly printed money. It could buy up the debt of governments whose credit ratings had tanked and borrowing costs had risen with similar energy.
That source of stability is probably not going to be available this time around. While the ECB certainly will make an effort to finance over-indebted governments, the French included, it will not have nearly the ability to print money now as it had 10-15 years ago. There is too much liquidity from those days—and from the pandemic days in 2020-2021—still sloshing around in the European economy.
Even moderate efforts at monetizing sovereign debt will quickly transform into rapid increases in inflation.
With the ECB at least partly helpless, the big question is what lies ahead once their limited capacity to monetize debt has been exhausted. Hopefully, the answer to this question will be scary enough to motivate France’s political leadership to get their act together.
