Macron Gets Debt Reprimand as S&P Hits France With Downgrade

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(Bloomberg) — S&P Global Ratings downgraded France, tarnishing President Emmanuel Macron’s record for debt management as his government struggles to get a grip on public finances in the wake of the Covid pandemic and energy crisis.

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In a statement on Friday, the credit assessor said that although reforms and a recovery in economic growth will allow the country to reduce its budget deficit, the gap will remain above 3% of gross domestic product in 2027.

Contrary to its previous expectations, S&P now expects France’s general government debt as a share of GDP will increase to about 112% of GDP by 2027 from about 109% in 2023.

The downgrade to AA- from AA puts France seven notches above junk on S&P’s scale, on a par with the Czech Republic and Estonia. The outlook on the rating is stable.

France has increasingly become a focal point in Europe for investors concerned about the long-term sustainability of vast government debt piles. The extra yield on 10-year bonds over German securities has already doubled from pre-Covid levels.

That premium inched higher to 48 basis points over the past week ahead of S&P’s decision. Mizuho International strategist Evelyne Gomez-Liechti said a downgrade would likely erase the spread tightening seen since April, when Moody’s Ratings and Fitch Ratings both reiterated their stance and outlooks on France.

The country faces a mounting challenge to contain debt after last year’s deficit came in much wider than initially planned amid weak growth and disappointing tax revenues.

The Finance Ministry initially responded to the deterioration by pledging additional spending cuts this year. But that belt-tightening was insufficient to avoid having to pare back longer-term pledges to fill budget holes.

France’s own High Council of Public Finance has said those revised fiscal plans now lack credibility and coherency as they require unprecedented cuts that would hurt economic output.

Reacting to S&P’s decision, Finance Minister Bruno Le Maire said the government remains determined in its strategy of targeting re-industrialization and full-employment to get the deficit under 3% of GDP by 2027.

According to the minister, the downgrade was driven by a sharp increase in debt when the government spent vast sums during the Covid pandemic to save businesses and protect households.

“The main reason for this downgrade is that we saved the French economy,” Le Maire said in an interview with Le Parisien. “We would probably have been downgraded sooner if we hadn’t taken these decisions.”

Nonetheless, the fiscal difficulties are a blow to Macron, who has sought to foster a reputation as an economic reformer capable of addressing France’s challenges of low growth and high public spending.

He is also facing a difficult political backdrop with Marine Le Pen’s National Rally far ahead of his centrist alliance in polls of voting intentions at next month’s European parliamentary elections. Meanwhile, some lawmakers at the National Assembly have threatened to trigger no-confidence votes that could ultimately bring down his government.

Despite the opposition, Macron’s government has tried to advance his economic agenda in recent weeks, presenting bills on cutting bureaucracy and announcing further changes to jobless benefits it says will boost employment and make savings.

Still, S&P said the agenda will continue to face strong opposition, both from parliament, where the government has no absolute majority, and from protests, like those seen against pension reform in 2023.

“Political fragmentation will likely make the continued implementation of policies to address economic and budgetary imbalances somewhat uncertain,” S&P said.

–With assistance from Alice Gledhill.

(Updates with Finance Minister’s comments from 10th paragraph)