Debt resilient: Visitors walk along the Trocadero esplanade in front of the Eiffel Tower. The mounting political risks have put France’s bonds under renewed pressure over the past two weeks. — AFP
PARIS: French Prime Minister Michel Barnier won a minor reprieve in his battle to pass a budget and remain in power as S&P Global Ratings reiterated its assessment of the country’s debt.
In a statement last Friday, S&P said the eurozone’s second-biggest economy remains resilient despite political uncertainty.
It cited the impact of labour market reforms under President Emmanuel Macron, high private sector savings, exports, and European Union membership.
The decision leaves France seven notches above junk on S&P’s scale at AA-, on a par with the Czech Republic and Slovenia.
“Rising political fragmentation is complicating fiscal governance, most notably by delaying the approval of a credible 2025 budget,” S&P wrote.
“Nevertheless, our base-case expectation is that French authorities will move ahead with budgetary consolidation amounting to just under 1% of gross domestic product (GDP) next year as part of a medium-term plan to moderate high budgetary deficits.”
The decision provides some respite for France after the ratings firm downgraded it in May.
Days after that, the country was plunged into a prolonged political crisis when Macron called snap elections.
Both Fitch and Moody’s responded to the turmoil in October by putting negative outlooks on their ratings, while Scope made a downgrade.
Macron had aimed to bring clarity with the summer ballot, but the gamble backfired as the National Assembly split between three feuding blocs: the left, a diminished centre which backs the president, and a strengthened National Rally led by Marine Le Pen.
At the same time, the government’s plans to repair public finances drifted further off course as tax revenues came in well below forecasts.
When Macron appointed Barnier to lead a minority government in September, the budget deficit was predicted to reach 6.1% of economic output this year instead of shrinking to 4.4% as initially planned.
Barnier’s team is now trying to push through a 2025 budget to return the deficit to 5% next year, with US$63.3bil of tax increases and spending cuts. However, the entire project has been cast into doubt as Le Pen’s lawmakers threaten to join leftists to bring down the government in a no-confidence motion as soon as next week.
The mounting political risks have put France’s bonds under renewed pressure over the past two weeks.
The gap between French and German 10-year bond yields – a widely watched measure of risk – at one point hit 90 basis points, the highest level since 2012.
That premium narrowed to 81 basis points in the final minutes of trading last Friday, as money markets priced in faster interest rate cuts from the European Central Bank.
In an attempt to survive as prime minister and preserve the budget, Barnier has made concessions that risk reducing the extent of fiscal consolidation France can achieve next year.
The National Rally has responded with further demands for modifications, and Le Pen has given the premier until today to adhere to her red lines before she decides whether to topple the government.
While S&P reiterated its rating, it said it now expects the budget deficit at the end of 2024 to be about 6.2% of GDP which means the “starting point for France’s fiscal adjustment is a difficult one.” Beyond 2025, the fiscal trajectory is unclear, it added.
Finance Minister Antoine Armand said in a short statement that S&P’s decision reflected the government’s efforts to repair public finances, while underlining the risk associated with political uncertainty that would call into question that trajectory.
“As observers have made very clear, the absence of a budget and political instability would – and I weigh my words carefully – lead to a sudden and substantial increase in the cost of financing French debt,” he said in a press conference last Saturday.
“Basic services are and will be provided regardless of the situation,” Armand added.
“But what would happen to household consumption, French savings, employment, growth and business investment if we had no budget?
“Which companies would invest in a France without a budget?”
S&P said it could take negative action on France’s rating if “the government is unable to reduce its large budget deficits or economic growth falls below our projections over a protracted period”.
Barnier is set to face a no-confidence motion as early as Wednesday after he’s expected to resort to article 49.3 of the constitution to adopt the 2025 social security bill without a vote.
Even if he scrapes through, similar votes are likely later in December over the entire budget.
Still, S&P said France should be able to avoid a government shutdown even if no budget is passed this year, as a technical administration could still legislate a fiscal continuity law that would enable it to collect taxes and pay salaries – with spending capped at 2024 levels – until a budget is enacted early in 2025. — Bloomberg
