The French government is doing its utmost to downplay the significance of the day, while preparing for what it deems inevitable. On the evening of Friday, April 26, two credit rating agencies, Moody's and Fitch, are due to issue opinions on the quality of France's debt, as they do every six months. While the likelihood of France being reprimanded by Fitch, which downgraded the country's rating a year ago, is considered low, a warning from Moody's is deemed plausible. Moody's sent a discreet signal at the end of March, underlining "the inherent risks in the government's medium-term fiscal strategy, which is based on optimistic economic and revenue assumptions and unprecedented restraints on expenditure."
This assessment complicates the government's agenda, which for the past two months has been disrupted by a succession of bad news on the budgetary front. In the space of a few weeks, France's Finance Ministry has had to correct almost all its over-optimistic macroeconomic forecasts. The estimate of the public deficit for 2023, expected at 4.9% of GDP, turned out to be well below the real figure of 5.5%, according to INSEE data published on March 26. This discrepancy stems from an overestimation of tax revenues by almost €21 billion. Meanwhile, expected growth in 2024 was reduced from 1.4% to 1% on February 18.
Finally, the public deficit forecast for 2024, which stood at 4.4% a few weeks ago, has been raised to 5.1% of GDP. On the other hand, the Finance Ministry has urgently promised €20 billion in new savings with immediate effect, only part of which has been detailed.
The political configuration of the Assemblée Nationale, where there is no majority, also complicates any attempt at structural reform that would restore budgetary credibility in the medium term. At this stage, only the forthcoming reform of unemployment insurance is likely to reassure the agencies.
Little impact on borrowing capacity
Until now, the rating agencies have been relatively lenient towards Paris, taking into account the social tensions surrounding pension reform and the dynamism of the French economy compared to its neighbors. But even in the president's camp, there are now doubts about the government's ability to gain time. "We're heading for a downgrade," said a government heavyweight. "But the bad news of recent weeks has had no effect on the markets, which had already anticipated it."
In fact, a sanction is unlikely to have any effect on France's ability to borrow. The major investors (banks, insurance companies and investment funds) have their own analysis teams that are often better equipped than the agencies, so they rely little on them. Yet the agencies determine the rates at which a country is financed. "The agencies do a thorough job, but they don't tell us much that we don't already know," said Stéphane Deo, economist and manager at Eleva Capital, which manages €11 billion in assets. "Even in 2012, when France lost its triple-A rating, it caused a lot of concern, but eventually nothing much happened."
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