France, Moody's and Fitch confirm the rating

France breathes a sigh of relief. The feared rating downgrade by Moody's and Fitch did not happen. The US agency confirmed its rating of Aa2. The outlook was also confirmed: it remains stable. The European agency, which had lowered its rating a year ago, instead maintained its AA- rating, still with a stable outlook. The reassurances of the Ministry of the Economy, headed by Bruno Le Maire, evidently convinced the company's analysts, despite a worsening of the public accounts that the agency had, however, predicted. 'The decision,' the minister said in a note, 'should encourage us to redouble our determination to restore our public finances and meet the President's target of reducing the deficit to less than 3% in 2027'.

It is not certain that President Emmanuel Macron's wishes will be fulfilled. The 2023 deficit was 5.5 per cent, Moody's note recalls, a level 'significantly higher than the official target of 4.9 per cent, making it unlikely that the government will be able to reduce the deficit to 2.7 per cent in 2027'. However, these developments are 'broadly in line with Moody's previous assessment' that the deficit targets will not be met and that debt will rise to 115% in 2027, which explains the rating retention. Debt servicing is now 3.4 per cent of public budget revenues, but 'could double over the next decade if debt levels do not fall significantly'.
France does, however, have - Moody's notes - a solid, diversified economy with high private savings and quality institutions.
The stable outlook stems from an assessment of risks that are considered 'balanced'. France,' the agency explains, 'has implemented structural reforms, especially in the labour market, which will still bear fruit and which the government could deepen. On the other hand, the debt could exceed the 112% target by 2027 and debt service could increase.
The outlook and rating could improve if the government succeeds in implementing measures that begin to reduce debt, but it could worsen - Moody's notes - if the agency 'concludes that the deterioration in debt sustainability will be significantly higher in France than in countries with the same rating'. An escalation of the war in Ukraine, the agency went on to warn, in a war directly involving NATO would create 'downward pressure on the rating'.

Fitch also believes that the 2027 target will not be met, but this is not a surprise for the European agency either. "France has only managed to keep the deficit below 3% four times in the last 20 years," the statement explains, "and we expect it to be subject to an excessive deficit procedure later this year. The 2023 deficit of 5.5 per cent is the second highest in the eurozone after Italy and, more importantly, it is twice as high - Fitch explains - as the median in the AA category. However, the agency believes that the Paris government will meet the 5.1 per cent target this year, even though it is 'much higher than the projected target of 4.4 per cent and the median for AA countries of 2.2 per cent'. The debt of 110.6% is the second highest in the group of similarly rated countries and exceeds the median of 50.1% 'by a large margin'. Thus, debt service could rise to 4 per cent of tax revenues in 2025, compared to a median forecast of 3.2 per cent.
The slowdown of the German economy will also weigh on the French 2024 GDP to 0.8 per cent, compared to a previous forecast of 1.1 per cent. However, Fitch also notes the results of labour market reforms, although the unemployment rate may marginally rise. The banking system remains solid, the agency notes, and governance of quality.