France’s Debt Situation Draws Attention from Rating Agencies
France’s financial stability is poised for a critical evaluation as imminent reviews by Moody’s Ratings and Fitch Ratings could signal a shift in the nation’s creditworthiness. The finance community is bracing for potential revisions, with forecasts suggesting a likely adjustment of the outlook to negative as early as this week. This speculation is rooted in both Moody’s and Fitch’s upcoming reviews, alongside an anticipated decision from S&P Global Ratings, which is set to conclude an 18-month warning period next month.
The alarm over France’s fiscal health was amplified following the government’s recent prediction of an expanding fiscal deficit in the near term. Despite the initiation of emergency budget cuts, officials concede that the goal of narrowing the deficit will not be reached as swiftly as promised, owing to sluggish economic growth and dwindling tax revenues.
Adam Kurpiel, head of rates strategy at Societe Generale, expressed concerns over France’s financial path, suggesting, “I definitely see chances of a negative outlook this Friday, if not a downgrade from Moody’s.” Such a development would serve as a cautionary signal to markets, though not wholly unanticipated. French debt, historically seen as nearly the safest in the eurozone after Germany’s, is starting to diverge amid fiscal pressures. This shift is underscored by a notable increase in the yield premium of 10-year French bonds over their German counterparts, which has doubled since the pandemic’s onset.
This evolving landscape is further evidenced by the relative underperformance of French bonds against those of Spain, Italy, and Portugal, despite these nations holding lower credit ratings. In particular, the gap in borrowing costs between Spain and France has significantly narrowed over the past six months, reflecting changing market perceptions regarding France’s fiscal stability compared to its eurozone peers.
Vincent Mortier, chief investment officer at Amundi, Europe’s largest asset manager, highlighted the pivotal decision facing France: aligning closer with either Germany’s fiscal prudence or Italy’s higher indebtedness. Considering Italy’s reputation for risky bonds due to its substantial debt load, France’s fiscal decisions will be crucial in determining its financial trajectory.
The sentiment among investors further echoes concerns over France’s fiscal health. Firms like Alliance Bernstein have taken a bearish stance on French bonds relative to Germany, citing a gradual decline in France’s credit rating. Similarly, Legal & General Investment Management has shifted its portfolio preferences towards Spanish bonds, attracted by Spain’s stronger fiscal indicators.
Rating agencies have consistently signaled apprehensions about France’s fiscal direction. A downgrade by Fitch last year, coupled with warnings of potential further negative actions, reflects growing skepticism. Moody’s and S&P have also expressed concerns, particularly regarding France’s commitment to fiscal consolidation and deficit reduction, setting the stage for a possible credit rating revision in the near future.
Moritz Kraemer, former global head of sovereign ratings at S&P and now chief economist at LBBW, pointed out the challenges in maintaining France’s current rating: “It would take some analytical gymnastics to affirm the rating at the current level…There’s really nothing that you could say has improved.”
As rating firms prepare to reassess France’s creditworthiness, the nation faces a critical juncture. Decisions made now will not only influence its financial markets but also set the tone for its economic policies and global standing in the years to come.
