France’s credit rating was cut by Fitch Ratings in another blow to politically embattled President Emmanuel Macron as he tries to bolster the country’s public finances with unpopular overhauls.
(Bloomberg) — France’s credit rating was cut by Fitch Ratings in another blow to politically embattled President Emmanuel Macron as he tries to bolster the country’s public finances with unpopular overhauls.
Fitch reduced France’s credit rating to AA- from AA, with a stable outlook, bringing the euro area’s second-largest economy to the same notch as countries including Ireland and the Czech Republic. France’s projected budget deficits for this year and next year “are well above” the median for countries with AA ratings, Fitch said in a note.
It is only the second time France has been downgraded since Macron took office in 2017 and the first time by one of the three major rating firms. In 2020, DBRS Morningstar cut France to AA (high) from the top-notch AAA.
Fitch’s rating cut tarnishes Macron’s credibility as an economic reformer pledging to reduce debt and spur growth, just as he was already struggling to sell his policies to French people.
Macron’s recent effort to plug gaps in the pension system by raising the retirement age has sparked mass protests and fractured parliament, making it harder to get the necessary support for future reforms. The government says those should include another labor overhaul to boost employment and a green industry bill to drive investment in the climate transition.€
“In the medium to long term, the recent passing of the pension reform will be moderately positive, generating annual gross savings of €17.7 billion euros ($19.5 billion) by 2030 (0.6% of GDP),” Fitch wrote.
Still, Fitch said that huge opposition to the retirement overhaul in street protests and Macron’s use of a constitutional provision to bypass a vote in parliament will strengthen anti-establishment forces.
“Political deadlock and — sometimes violent — social movements pose a risk to Macron’s reform agenda and could create pressures for a more expansionary fiscal policy or a reversal of previous reforms,” the Fitch analysts wrote.
The rating firm’s downgrade also casts doubt over whether Macron’s government will succeed where predecessors failed in reducing France’s public debt burden after years of near relentless increases.
“This decision is notably the result of Fitch’s pessimistic assessment of France’s growth outlook and debt trajectory,” Finance Minister Bruno Le Maire said Saturday, adding that the rating company undervalued the impact of structural reforms, including the pension overhaul.
Last week, the finance ministry outlined a long-term plan to rein in the budget deficit and put debt on a downward path. That relies on improving economic growth with lower taxation and labor market reforms to drive employment, winding down fiscal support to mitigate high energy prices, and containing the increase in spending below inflation.
The country’s public finance watchdog, HCFP, has cautioned that plans rely on growth estimates that “seem optimistic” and inflation forecasts that appear to be somewhat under-estimated.
Le Maire has said cutting debt is imperative as servicing costs are already set to rise to around €70 billion a year within the next five years.
“We prefer to accelerate debt reduction today than to raise taxes tomorrow,” Le Maire said earlier this month.
–With assistance from Zoe Schneeweiss.
(Updates with details on previous rating cuts in third paragraph, further comment from Fitch in seventh and eighth paragraphs.)
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