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France's credit rating was downgraded by S&P Global, dealing a blow to Emmanuel Macron's credibility as a steward of the economy, once a bright spot during his presidency.
The rating agency changed France's long-term issuer rating to AA- from AA with a stable outlook, citing concerns that government debt as a percentage of gross domestic product will rise through 2027 and not fall as much as previously expected.
S&P also blamed weaker-than-expected growth in France for the drop, and expressed concern that “political divisions” will make it difficult for Macron's government to implement reforms to boost growth and “reduce fiscal imbalances.”
A downgrade could have significant political consequences for President Macron, but the financial impact is likely to be limited, as was the case after the last major downgrade after the eurozone crisis nearly a decade ago.
The bad news about finances comes as Macron's centrist coalition faces a major defeat in the June 9 European elections. According to Ipsos, the coalition is trailing Marine Le Pen's far-right national party by 17.5 percentage points in opinion polls. Opposition parties are preparing to debate two motions of no confidence on Monday to challenge the government's handling of the budget, but they currently have little chance of passing.
Macron no longer boasts a majority in parliament, making it harder to pass bills and budgets, although the French constitution allows the government to override lawmakers on budgetary matters.
“The downgrade by S&P is justified, as France and Italy are the only two eurozone countries with such high and worsening debt-to-GDP ratios,” said Charles-Henri Colombier, director of the Lexcord Institute for Economic Research. “It's a warning to the government that it needs to do more to cut spending and not just try to boost growth.”
The government has been preparing for a downgrade since it revealed in January that its budget deficit last year was 5.5 percent of GDP, well above the forecast 4.9 percent.
Deficits are common in countries that have not balanced their budgets for decades, but the euro zone's second-largest economy faced an unexpected tax revenue shortfall of 21 billion euros in 2023.
The situation shows the limits of Macron's strategy since first being elected president in 2017 – betting that cutting taxes for corporations and implementing business-friendly reforms will spur enough economic growth to support France's generous social welfare model.
With unemployment falling to its lowest level in decades and foreign investment on the rise, the government continues to spend heavily on public services and exceptional measures to protect businesses and households from the impact of the pandemic and energy crisis.
The result was a widening budget deficit and a ballooning national debt.
The impact was less when interest rates were lower, but borrowing costs have risen from 29 billion euros in 2020 to more than 50 billion euros this year, more than the country's annual defense budget, and are expected to reach 80 billion euros in 2027.
France still aims to bring its budget deficit back down to the EU benchmark of 3% of GDP by the end of President Macron's second term in 2027. But economists say that's highly unlikely, and S&P's new forecast puts the deficit at 3.5% of GDP in 2027.
“We believe that the French economy and public finances overall will continue to benefit from the structural reforms implemented over the past decade,” S&P said, “but without additional deficit reduction measures, reforms alone will not be enough to help the country achieve its budgetary targets.”
General government debt as a percentage of GDP will “continue to increase” from 109 percent last year to 112.1 percent of GDP in 2027.
Macron's finance minister, Bruno Le Maire, is seeking savings in everything from climate change measures to apprenticeship subsidies to cut a further 10 billion euros this year after cutting 10 billion euros in January.
The Budget Ministry says at least a further 20 billion euros in cuts will be needed next year, which risks hurting growth.
The government has also insisted it will not raise taxes on households or businesses — a hallmark of Macron's economic policies — a stance the opposition has criticized as unrealistic given holes in the budget.
The government forecasts growth of 1 percent this year, above the Bank of France's forecast of 0.8 percent.
Experts say S&P's downgrade is not expected to have a big impact on France's borrowing costs because investors still view the country as reliable. The gap between German and French 10-year government bond yields has narrowed slightly this year.
“Our bonds will easily find buyers on the market,” Le Maire told Le Parisien newspaper after the downgrade. “France still has a good reputation as an issuer and is one of the best in the world.”
