France’s Le Maire goes full out to avoid S&P credit rating downgrade

The French government is fighting tooth and nail to prove to Credit Rating Agency S&P Global that it should not downgrade the country’s rating in spite of high debt and deficit levels, opening up complex questions on financing the green transition.

“We have good arguments to put forth,” French Economy Minister Bruno Le Maire told public broadcaster France Inter, two days before S&P is due to publish its new credit rating for France on Friday (2 June).

The current ‘AA’ grade is likely to get downgraded, with debt levels one of the highest in the EU at 111.6% of GDP in 2022, and a yearly deficit of just below 5% of GDP.

Another credit rating agency, Fitch, downgraded France’s rating from ‘AA’ to ‘AA-’ in late April, citing unsatisfying debt reduction plans and social unrest.

“We have a credible strategy to accelerate France’s debt reduction path,” Le Maire said, who committed to reducing debt levels to 108.3% by 2027.

The country is also passed the worst part of the inflationary crisis, French Central Bank head François Villeroy de Galhau announced on Wednesday.

All in all, “we will be uncompromising” with the reduction plan, Le Maire said, claiming he had made a compelling case to S&P when he met its representatives earlier this week.

French debt reduction targets raises issue of austerity

Economy Minister Bruno Le Maire presented the government’s 2023-2027 debt reduction targets, aiming to lower them by four percentage points after years of extensive spending, but the opposition warns this marks the start of austerity in Europe.

From whatever-it-takes to saving up

The political narrative to wrestle back control over public finances follows years of heavy public spending to battle off the worst effects of the COVID pandemic and keep the economy running, whatever it takes.

Within the space of a year, the French government signalled its willingness to change course: its now-infamous pensions reform looks to save up to €13.5 billion by 2030.

New rules would actively push the unemployed to look for a job, lowering benefits when the unemployment rate is under 9%. This is expected to bringin €4.5 billion every year, starting from 2025.

Broad-sweeping energy support has also been curtailed in favour of more tailored help.

“The issue of public debt is coming back to the fore because the economy is slowing down and interest rates are going up, which has a direct impact on public finances,” Charlotte de Montpellier, a senior economist at ING, told EURACTIV.

Interest rates on the French public debt amounted to almost €50 billion in 2022, according to specialised news outlet fipeco.

French Central Bank chief urges Macron to end generous public spending

To reduce inflation and further economic growth, the government must end the generous spending policy it adopted since the start of the COVID-19 pandemic, Central Bank Governor François Villeroy de Galhau wrote in a letter to President Emmanuel Macron that …

Is a downgrade bad?

So, the government has been at it to prove to S&P – and, indirectly, financial markets – that it takes debt reduction seriously.

If the downgrade goes ahead, “interest rates will rise up, and the cost of debt contracting will increase”, Jezabel Couppey-Soubeyran, a monetary and finance economist, told EURACTIV. Credit rating agencies “follow and accentuate” market realities, rather than anticipate new trends, she said.

According to ING’s de Montpellier, this is so much so that the rating downgrade “is already largely integrated in investors’ market analyses”, and there will be little to no effect on the actual economic situation of the country after Friday.

Eric Hayer, director at the left-leaning think-tank OFCE, takes the thinking a step further: even with a downgrade, “the rating is good”, he wrote for The Conversation.

Any creditor thinks in relative terms, Hayer explains, and France still has one of the highest ratings in the world. It is below Germany, the Netherlands and the US, but at the same place as the UK and Belgium, and better placed than China and Japan.

Subscribe to The Economy Brief

Subscribe to Euractiv’s Economy Brief, where you’ll find the latest roundup of news about the European economy and about a variety of policy issues from workers’ rights over trade agreements to financial regulation. Brought to you by Anna Brunetti,

At the same time as debt reduction seems to be back on the political agenda, others are warning that the ecological transition will require financing: up to €66 billion every year until 2030, according to a newly published report, and debt rounds could be the right vehicle.

“Delaying green investments in the name of reducing public debt would only improve things at the surface, without any substantive benefits,” the report’s co-authors Jean Pisani-Ferry and Selma Mahfouz write.

The issue is not debt contracting in itself, but rather ensuring that it is spent on investments that pay back, and for which the returns – financial, ecological or otherwise – outweigh interest costs.

As such, alternative financing tools would seek to sustain unprofitable public spending that cannot rely on public debt. Couppey-Soubeyran believes setting-up public financial companies, the role of which would be to help finance green spending that would not otherwise be eligible for loans, is a credible option.

The Pisani-Mahfouz report also hints at increased taxation of the wealth of the richest 10%, worth €3,000 billion in 2021. A levy of 5% could bring in €150 billion over the next thirty years; that is, a yearly €5 billion. Not enough to cover the full costs of the transition, but a good start nonetheless.

However, Le Maire has ruled that option out completely, not wanting to add to the tax burden of France’s wealthiest.

[Edited by János Allenbach-Ammann/Nathalie Weatherald]

France’s Le Maire hangs on to debt reduction plan amid Fitch downgrade

Rating agency Fitch underestimates the impact of newly-approved structural reforms, including the pensions bill, said Economy Minister Bruno Le Maire after the credit rating agency announced it would downgrade France’s credit rating. 

Read more with Euractiv

EPP launches last-minute attack on EU corporate due diligence law

Right-wing MEPs have tried toppling a compromise deal on the EU's Corporate Sustainability Due Diligence Directive ahead of a crucial European Parliament vote on Thursday (1 June).