S&P Global Ratings downgraded France, tarnishing President Emmanuel Macron’s record on debt management and plunging him deeper into political difficulties a week before European elections.
In a statement on Friday, the credit expert highlighted the French government’s missed targets in plans to limit the budget deficit after huge spending during the Covid pandemic and energy crisis.
S&P said that while reforms and a recovery in economic growth would improve the situation, the hole would remain above 3% of gross domestic product in 2027.
The acronym for AA is a brutal blow to Macron, who has been seeking to bolster his reputation economic reformer could solve France’s problems of low growth and high government spending.
The timing is also problematic for his government as it seeks to build on Macron’s economic record in the campaign for European Parliament elections on June 9. Polls show his Renaissance group continues to lag far behind Marine Le Pen’s far-right National Rally.
Le Pen took advantage of S&P’s decision to urge voters to sanction Macron in the EU elections. She also called on other opposition lawmakers to support her party’s latest motion of no confidence to bring down his government.
“The disastrous management of public finances by governments that are as incompetent as they are arrogant has left our country in serious difficulties with record taxes, deficits and debt,” she said in a post on X late Friday.
Reacting to S&P’s decision, Finance Minister Bruno Le Maire said the government remains resolute in its strategy of reindustrialization and full employment to ensure the deficit does not exceed 3% of GDP by 2027.
The minister said the downgrade was caused by a sharp rise in debt as the government spent huge sums to rescue businesses and protect households during the Covid pandemic.
In its decision, S&P said that, contrary to previous expectations, it now believes France’s public debt share of GDP will increase to around 112% of GDP by 2027 from around 109% in 2023.
“The main reason for this downgrade is that we saved the French economy,” Le Maire told Le Parisien. “We probably would have been demoted sooner if we had not made these decisions.”
The downgrade puts France seven notches above junk on the S&P scale, on par with the Czech Republic and Estonia. The rating outlook is stable.
France has increasingly become a focus in Europe for investors concerned about the long-term sustainability of huge piles of government debt. The extra 10-year yield over German gilts has already doubled from pre-Covid levels.
Over the past week, in anticipation of the S&P decision, that premium has risen to 48 basis points. Mizuho International strategist Evelyn Gomez-Liechty said the downgrade would likely reverse the tightening spread seen since April when Moody’s Ratings and Fitch Ratings repeated their position and views on France.
The European Union’s second-largest economy faces a growing challenge to contain debt after… last year’s deficit turned out to be much wider than originally planned, amid weak growth and disappointing tax revenues.
Ministry of Finance initially answered to worsen the situation by promising to further cut spending this year. But this belt-tightening was not enough to avoid the need to cut costs. long term dutiesto fill holes in the budget.
France’s High Council of Public Finance said the revised budget plans now lack credibility and consistency as they demand unprecedented cuts that will harm economic production.
Political parties other than Le Pen’s National Rally have used debt woes to attack Macron’s government in recent weeks, with the far left also proposing a separate vote of no confidence in Monday’s National Assembly debate.
However, so far the centre-right Republicans party, which would have played a decisive role in a successful no-confidence vote, has refused to join with other groups to bring down the government and is unlikely to do so on Monday. But it remains a vocal criticism of the government’s fiscal policy.
“France has been sanctioned for its mistakes and budgetary inconsistencies,” Eric Ciotti, head of the Republican party, said in a post on X. “This is where the pathetic management of public finances by the Macron-Le Maire duo is leading us.”
Despite opposition, Macron’s government has tried to push forward his economic agenda in recent weeks by introducing spending-cutting bills. bureaucracy and announcing further changes to unemployment advantagesit says it will increase employment and save money.
However, S&P said the agenda would continue to face strong opposition both from parliament, where the government does not have an absolute majority, and from protests similar to those seen against pension reform in 2023.
“Political fragmentation is likely to make continued implementation of policies to address economic and fiscal imbalances somewhat uncertain,” S&P said.