Bad news for the French economy: the financial rating agency Fitch has just downgraded France from AA to AA-. Although Fitch is the only rating agency to have lowered its rating for the moment, the signal sent is nevertheless very negative for the French government.
Ten years ago, at the time of the socialist president François Hollande, France lost the prestigious AAA rating—a guarantee of good financial health—which it had held since 1975. The French rating has subsequently changed little. In May 2020, Fitch gave it an AA with a negative outlook. From now on, France will have to make do with an AA- with a stable outlook and will leave the group of countries with the ten best ratings in the world. The agency forecasts a “modest increase in public debt” in the coming months. The scale of the social movements that have been shaking France for several weeks is undoubtedly one of the factors explaining this assessment, but it is not enough to justify the decision of the American agency.
Minister of the Economy Bruno Le Maire intends to reassure himself by explaining that Fitch’s diagnosis remains isolated for the moment: a few days ago, another agency, Moody’s, chose to maintain its rating of Aa2 with a stable outlook, the equivalent of AA for Fitch. Bruno Le Maire accused Fitch in a press release of underestimating the structural reforms undertaken by the government—unemployment insurance reform; pension reform; lowering production taxes.
Nevertheless, the announcement of the downgrade by Fitch sounds like a slap in the face for the French government, and especially for Emmanuel Macron, ironically described during his election by his opponent Marine Le Pen as “the Mozart of finance.” During the debates on pension reform, Emmanuel Macron clumsily played on the argument of the financial markets to justify his choices and exert moral pressure on MPs: without the reform, France’s rating risked being downgraded.“With the reform, the rating was indeed downgraded,” notes the investigative newspaper Mediapart which is highly critical of the president’s actions.
The statement published by the Fitch agency is without appeal. Fitch mentions “social movements (sometimes violent)” and points to a “political impasse” that will affect France’s ability to reduce its deficit and debt.
Fitch believes that social and political pressures illustrated by the protests against the pension reform will complicate fiscal consolidation. The Macron government lost its majority in the July 2022 elections and bypassed a vote in the National Assembly using constitutional powers under Article 49.3 to pass the controversial pension reform. The decision has led to nationwide protests and strikes and will likely further strengthen radical and anti-establishment forces.
The problem is therefore profound: the political class in power has neither the credibility nor the political room for manoeuvre to reform the country. It has largely contributed to worsening the debt, which now stands at over €3,000 billion (111,16% of GDP in 2022). Its responsibility for the current state of public finances is crushing: France is now paying for the famous ‘whatever it takes’ of COVID—a questionable choice that many of its European neighbours did not make at the time of the pandemic, and which weighs heavily today.
As editorialist Renaud Dély mentions on France Info, the mention of a “political impasse” in the Fitch press release is perhaps the most serious aspect of the downgrade: it means that Emmanuel Macron is now suffering from a serious political discredit at both national and international level. It is now an open secret that Macron, still in power for four years, is de facto unable to continue reforming.
If Bruno Le Maire plays the optimism card, another tune is heard from Prime Minister Élisabeth Borne: “A Greek scenario is possible”, she would have confided to France Info.
The state is weakened, but French companies will also suffer from the downgrade, as economist Sébastien Laye explained to Le Figaro: “all start-ups or companies based in France and operating on the French market will see their valuations fall as a result of this new rating,” he predicts.
The decision of Standard and Poor’s, the third American rating agency, is expected in early June. It too is likely to confirm France’s downgrade.
