Add another to the list of challenges facing President Emmanuel Macron following raucous nationwide demonstrations over his retirement measures: a cascade of warnings about French finances.
On Friday, S&P Global warned it still has a negative view on France’s credit rating. It was a step away from a downgrade, which some had expected, but comes after two other rating agencies lowered their outlook on the country in the past month.
S&P Global maintained its investment grade credit rating for France, a decision the government of Mr. Macron eagerly awaited. But in reiterating a negative outlook first published in January, the rating agency expressed concern over France’s ability to rein in its public finances amid already high government debt.
And it raised analysts’ concerns about Mr Macron’s ability to continue his efforts to improve the country’s competitiveness and growth in a tense social and political climate.
French Finance Minister Bruno Le Maire said in an interview published Friday evening in the Journal du Dimanche that he viewed the announcement as a “positive signal”, adding: “Our strategy for public finances is clear. is ambitious. And it is credible.”
At the end of April, Fitch Ratings downgraded the credit rating of French government bonds by one notch to AA–, following a downgrade in December. Scope Ratings, a European agency, issued a negative view of its assessment of France last month.
The French economy, the second largest in the Eurozone, is expected to remain weak until at least next year, but more worrying for rating agencies is the country’s financial situation. France has spent huge sums protecting households and businesses from an inflationary crisis and painful pandemic lockdowns.
Debt has risen to 111 percent of economic output, putting France in a club with Greece, Italy, Portugal and Spain – the eurozone’s main economies with the highest debt ratios. In Germany, which has the largest economy in Europe and favors fiscal discipline, debt is 66 percent of economic output.
S&P Global said it could downgrade France’s ratings in the next 18 months if debt did not fall, a risk that would be heightened if a prolonged economic slowdown set in or if France did not adequately curb government spending.
The potential for a downgrade concerned the government and was so sensitive that Mr. Le Maire and French Prime Minister Élisabeth Borne recently met with S&P representatives to plead their case. S&P had warned France in January that a downgrade was possible.
“There were detailed statements from Bruno Le Maire to Standard & Poor’s about everything we do to control our public finances,” Ms Borne told a French radio station last week. The finance minister “explained France’s reforms and its aim to reduce the country’s budget deficit,” she said.
Mr Le Maire has said that fueling economic growth is the best way to pay off debt. But as the economy is expected to grow by just 0.8 percent this year, the government has been sifting through the budget to find compensatory cuts and limit spending growth.
Rating agencies have expressed concern that the potential political deadlock and social unrest pose risks to Mr Macron’s agenda. Nationwide demonstrations — many of them violent — erupted after he called on the executive to bypass parliament to push through a measure that raised France’s statutory retirement age from 62 to 64, a change nearly three-quarters of voters opposed in opinion polls.
Mr Macron, who lost a parliamentary majority in his re-election in April, said the maneuver was necessary to prevent the pension system from falling into deficit and to deliver €17bn ($18.2bn) in savings over the next few years. to generate. Fitch and S&P Global gave it an approving nod as a moderately positive development.
But S&P Global warned that “political fragmentation” under Macron’s watch had raised questions about his government’s ability to implement policies to fuel more growth and rein in the budget deficit.
His critics saw Mr Macron’s use of executive power as an abuse of power and have vowed to continue fighting over other measures Mr Macron plans to put forward. Opponents have continued to harass the president and his cabinet members by banging pots and pans during their official trips.
Mr Macron has tried to show that he quickly put France back to work and tried to polish his image after the unrest. He hosted 200 global CEOs, including Disney’s Elon Musk, Robert A. Iger and Lakshmi Mittal, the steel magnate, in Versailles last month for a business conference that yielded pledges of €13 billion in new investment in France.
The moves are part of a plan by Mr Macron, a former investment banker, to attract new investment and boost green industries to revitalize the French economy – in part by spending lavishly on grants to attract foreign companies and prevent French companies from relocating jobs abroad.
Since taking office in 2017, Mr Macron has reduced corporate taxes and made it easier to hire and fire employees. New rules would encourage the unemployed to look for work, a controversial measure that would generate more than €4 billion in savings and, in theory, help address labor shortages. And for the fourth consecutive year in 2022, France was the European country that attracted the largest number of foreign investments, according to a study by EY, formerly Ernst & Young.
S&P Global said it expected the performance of the labor market and the French economy in general to “continue to benefit from the reforms implemented over the past decade”.
But such developments have not allayed concerns about France’s ability to ameliorate the massive expenditures incurred by the government.
France’s public debt soared after Macron spent nearly half a trillion euros to support the economy during the Covid pandemic. It is now almost €3 trillion, and the cost of servicing debt, which was low during the pandemic, has recently spiked due to inflation: about a tenth of all bonds issued by the French government are indexed to the inflation, increasing the state’s payment account. Additional pressure is the interest rate increase by the European Central Bank.
All told, France’s debt, or the amount of interest to be repaid, has risen from $31 billion in 2022 to €42 billion in 2022. The government expects this amount to rise to €60 billion in 2027, the same amount as the national education budget.
“A lot of money has been spent to help the economy, people and businesses,” said Charlotte de Montpellier, France analyst at ING Bank. “It worked when the economic situation was good, but public finances have had a serious impact.”
