S&P downgrades France's rating on deficit overshoot, reports deterioration in budgetary position

Standard & Poor’s (S&P) has downgraded France’s credit rating for the first time in more than a decade due to deterioration in the European country’s budgetary position, landing a hard blow on the government of President Emmanuel Macron.

The rating agency delivered the rebuke on Friday, saying that it had downgraded France’s long-term sovereign debt rating to “AA-” from “AA”.

It cited expectations that higher-than-expected deficits would raise debt ceiling in the euro zone’s second-biggest economy.

The downgrade, which put France on par with the Czech Republic and Estonia, has occurred for the first time since 2013, S&P said.

The budget deficit, it said, is forecast to remain above 3 percent of GDP in 2027.

“The downgrade reflects our projection that, contrary to our previous expectations, France's general government debt as a share of GDP will increase as a result of larger-than-expected budget deficits over 2023-2027," S&P said in a statement.

Macron, whose government struggles to cut the far-right’s considerable poll lead ahead of European Union parliamentary elections on June 9, has focused on economic reform.

However, S&P warned that political divisions would hinder planned reforms to balance the budget, while the French leader faces criticism as the deficit remains high and debt is projected to increase.

Economy Minister Bruno Le Maire reaffirmed the government's commitment to reducing the deficit. He attributed the downgrade to the government’s extensive spending during the COVID-19 pandemic.

This is while critics blame the government’s poor financial management as a credit downgrade which could deter investors and increase debt repayment challenges.

The government anticipates reducing its public sector budget deficit from 5.1 percent of economic output this year to 4.1 percent next year, with the goal of reaching the EU's 3 percent fiscal deficit limit by 2027.

French Finance Minister Bruno Le Maire asserted that the downgrade would not diminish his determination to enhance France’s public finances, attributing the fiscal decline to the expenses incurred during the COVID-19 pandemic crisis.

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On Friday, S&P also declared a downgrade in the ratings of the three Baltic States – Estonia, Latvia, and Lithuania – pointing to the repercussions of the conflict in Ukraine and geopolitical uncertainties involving Russia.

The political repercussions of the downgrade are expected to be significant, providing opposition parties with ammunition to criticize the government.

“We believe political fragmentation adds to uncertainty regarding the government’s ability to continue implementing policies that increase economic growth potential and address budgetary imbalances,” S&P further said in its statement.

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