The European rating agency Scope Ratings reduced France’s credit outlook from “stable” to “negative”, due to doubts about the ability of Emmanuel Macron’s government to boost growth and reduce the level of debt, which reaches 111.6% of its Gross Domestic Product (GDP).
The decision follows Fitch Ratings’ cut to AA from AA earlier this month for similar reasons, underscoring the risks that a political impasse – following protests over pension reforms – delays other economic reforms. that it considers necessary for debt sustainability.
Despite the fact that Scope is not one of the main rating agencies at the level of Fitch or Standard&Poor’s, it is accredited before the European authorities.
One of the problems of the French coffers is the level of deficit, with 2022 closing at 4.7% of GDP, which will eventually have to go back to being equal to or less than 3% when financial discipline rules come back into force of the European Union, suspended since the pandemic.
Scope predicts that between this year and 2028 the deficit will average 4.1%, compared to 3.1% in the 2015-2019 period, while the debt would grow to 114% of GDP in 2027, against the government objective of reducing it to 108.3% given that, although the primary deficit will be reduced, the interest burden will increase and economic growth will be moderate, averaging 1.4% per year.
Although France is not the European country with the highest proportion of debt -Greece and Italy reach 178.2% and 147.3% of GDP, respectively- the rating agencies focused on Macron’s inability to weave agreements and carry out reforms , as well as the impact of the rise in interest rates on the debt.
In addition, Fitch considered, when reducing the rating, that the level of debt was “too high” compared to the average of countries with AA grades.
After Fitch and Scope’s decision, S&P’s is now expected in a week, and a rating cut is not ruled out.
The French government outlined a long-term plan to reduce the deficit and debt, gradually reducing subsidies to contain energy prices and the impact of inflation, and reining in increased spending.
However, the French Higher Council for Public Finance – an independent fiscal oversight body – considered that the plans depend on growth projections “that seem to be too optimistic” and on inflation forecasts, on the contrary, underestimated.
Scope, in a statement released by the Bloomberg news agency, did not rule out cutting the debt rating in the next 18 months if the proportion of public debt continues to rise, or if a significant deterioration in growth prospects is observed, although for now It kept it unchanged due to “its favorable debt profile, excellent access to capital markets, and its resilient banking sector.”
The political situation also casts doubts, as the agency indicated that Macron’s lack of a majority in parliament and social unrest make it difficult for the reforms to go ahead until the end of his term in 2027.
According to the rating agency, the pressures on public spending will persist as it considers that it will be difficult to reverse the countercyclical measures implemented during the pandemic and the energy crisis, which is added to the expenditures for social security and public services, which are mostly , indexed for inflation.
Source: Ambito
