PARIS (Reuters) – Standard & Poor’s (S&P) decision to downgrade its rating on France’s sovereign debt should in the short term deliver more political sting than pain in financial markets.
Days ahead of a June 9 EU parliamentary election, S&P cut France’s long-term sovereign debt rating on Friday to “AA-” from “AA”, citing expectations that higher than expected deficits would push up debt in the euro zone’s second-biggest economy.
WHAT MARKET REACTION CAN BE EXPECTED?
Citigroup analysts said in a note on Wednesday that a downgrade could push the spread between French and German benchmark bonds out by 3-5 basis points (bps).
That would be a relatively minor impact, pushing the spread out to around 50 bps, roughly where it stood two months ago after the government hiked its budget deficit estimates.
WHAT’S THE IMPACT ON POLICY?
The downgrade adds pressure on President Emmanuel Macron’s government to detail billions of euros in budget savings needed to keep its deficit reduction plans on track.
After raising its estimates in April, the government now expects to cut its public sector budget deficit from 5.1% of economic output this year to 4.1% next year, with aim of reducing the fiscal shortfall to an EU ceiling of 3% by 2027.
S&P said it expected France to miss its 2027 target, forecasting the deficit would stand at 3.5% of GDP then.
The International Monetary Fund and the national public finance watchdog also questioned whether that target is in reach and urged the government to detail promised budget savings.
The government has said that even to meet this year’s deficit target it will need to make 20 billion euros ($22 billion) of budget savings that were not included in the 2024 budget law.
It has said some of that will come from ministerial spending freezes, cutting development aid, axing wiggle-room for unplanned spending and additional belt-tightening by local governments.
But the government is under pressure to be more specific and in particular detail additional savings also worth 20 billion euros for next year.
POLITICAL REPERCUSSIONS?
The downgrade comes as Macron’s party is struggling to reduce the far right’s comfortable lead in the polls ahead of European Parliament elections on June 9.
Since Macron was first elected in 2017, his mostly positive economic track record has been one of his stronger points, which the downgrade now calls into question.
“All of the opposition parties will use the (downgrade) news to attack the government’s financial and economic record,” said economist Charles-Henri Colombier with think-tank Rexecode.
The downgrade could also embolden opposition lawmakers to vote motions of no-confidence due on Monday against Macron’s minority government, although much will depend on whether divided conservatives throw their weight behind them.
Both the far right and far left have tabled the motions over the government’s refusal to submit new legislation for an amended 2024 budget to reflect the measures needed to finance the wider than expected deficit.
HOW DID THE OPPOSITION REACT?
Marine Le Pen, whose far-right Rassemblement National party is between 10-12 points ahead in polls before next week’s EU elections, was damning.
“The catastrophic management of public finances by governments as incompetent as they are arrogant has put our country in very serious difficulties with record taxes, deficits and debts,” it said.
Eric Ciotti, the head of the conservative Les Republicains party, which Macron’s camp has repeatedly courted, said it was evidence of a “pitiful management of public finances”.
The far left La France Insoumise accused the government of wanting to use the downgrade to reduce public spending and target social protection to reduce deficits.
“The rating agencies, like the debt scarecrow, are only pretexts to increase austerity and supply-side policies,” it said.
($1 = 0.9224 euros)
Source: Economy - investing.com
