“It’s like asking a student who’s been 20 out of 20 for a long time and gets to 19 if it’s a disaster.” This is how, in 2012, the former Budget Minister François Baroin tried, at 8:00 p.m. on France 2, to put into perspective the deterioration of the French debt rating by the agency Standard & Poor’s (S&P).
For the first time, France lost, in the middle of the sovereign debt crisis in Europe, its rosy triple A with the most influential of the American rating agencies. With the impact of the subprime crisis, French debt had gone from 69% of GDP to more than 90%. As for most of the big European economies, except that France’s then continued to rise when the UK, for example, was stabilizing and Germany’s was already beginning to decline.
Bercy in operation seduction
If French debt has not regained its triple A status since then and was even downgraded again in 2013 from AA+ to AA, a further downgrade is now feared this week. Standard & Poor’s will publish its rating for France on Friday and if it follows the trend of its Fitch counterpart, the AA could become AA-. In other words, 20 out of 20, which became 19 in 2012, 18 in 2013, could now go down to 17, to use François Baroin’s formula. More exactly the same note.
For several weeks, at the highest peak in the state, a seduction operation has been launched towards the most influential of the rating agencies (with Moody’s). The Treasury management is in contact with the agency and even Bruno Le Maire has met with the leaders in recent days, reports The express.
Objective: Convince S&P analysts that France’s fiscal track record is credible. In other words, reduce public debt to 108% of GDP in 2027 (compared to 111.6% at the end of 2022 and 112.9% in 2021) and complete a push below 3% of the deficit on the same date ( 4.7% in 2022).
Is there no consensus to reform?
A not-so-utopian project, but one about which the Fitch agency expressed its doubts at the end of April by lowering the rating of French debt from AA to AA-. The agency cites in particular the socio-political manifestations resulting from the pension reform that could, according to it, curb the government’s desire for reform in the future. Therefore, it is paradoxically within the framework of a structural reform to save money that Fitch believes that France’s financial situation could deteriorate.
European ratings agency Scope followed Fitch’s lead in May by lowering the country’s outlook, which could lead to a possible downgrade. Here again it is the political situation that worries analysts and in particular the absence of a majority in Parliament that deprives the government of decision-making power. The agencies, therefore, make an assumption about the social consensus that would allow the government in the next four years to limit the increase in public spending.
If the possible downgrading of France by S&P, an agency more influential than Fitch, had political consequences, particularly for Bruno Le Maire who wants to have an image of seriousness and credibility in budget matters, the economic consequences would be a very weak reality.
Disconnect Between Sovereign Rates and Ratings
“Standard and Poor’s decision on France’s rating is the subject of attention that seems excessive given the real importance of these ratings,” said Sylvain Bersinger, economist at Asterès.
By losing its triple A in 2011, the United States did not suffer an increase in its interest rates. Same for France. A year after the triple-A loss in 2012, the country was even borrowing at rates 1 point lower despite a lower rating. And what about Japan, whose debt amounts to 200% of GDP (almost double that of France), which has significantly lower ratings than France in all the agencies, and yet which borrows at some of the rates lowest in the world? negative).
No Consequences After Fitch Downgrade
In addition, Fitch’s downgrade of the rating in April had no consequence on the evolution of the borrowing rate in France. Yields on 10-year debt have fluctuated over the past three months, but more in line with changes in key central bank rates than ratings agency views. This rate is currently below 3%, whereas it was above 3.2% when France was better rated.
Another indicator, the spread, that is, the difference between the borrowing rate of Germany, the safest borrower (rated triple A by all the agencies), and France, has remained stable since the end of April. Germany borrows at a rate around 0.5 points lower than France’s, but this gap is historical and even tends to decrease (it was above 1.5 points at the beginning of the 2010s).
In other words, investors anticipated Fitch’s rating or do not share its analysis of France’s fiscal outlook. Especially since even with an “AA-“, national sovereign debt would remain at the top of the highest rated in Europe behind Germany, Ireland, Austria and the Scandinavian countries but ahead of all other nations.
A little thorn in the side
If the ratings agencies are no longer raining or shining on the sovereign debt markets, France’s debt remains no less worrisome and costly in this period of rising interest rates.
France will borrow 270 billion euros throughout 2023 with a debt load that should reach 52 billion euros. An increase of one point in the borrowing rate implies an additional cost of 2,400 million euros for public finances in the first year, 6,000 million in the second, and 9,000 million in the third. Much less money for possible tax cuts and purchasing power redistributions.
“The rate at which a borrower borrows is the determining variable because, if it increases, the interest charges increase proportionally, which represents a ‘snowball’ risk,” recalls Sylvain Bersinger. Interest charges plus high rates worsen a borrower’s financial condition, major lenders charge higher rates to cover the perceived risk of default, and so on, until a potential default is triggered.”
More than Friday’s note, what is important is the level of French debt. And this one, we already know.
Source: BFM TV
