Following Standard & Poor’s (S&P) decision to downgrade France’s long-term sovereign debt rating from “AA” to “AA-“, the financial markets are expected to react slightly with a potential spread between French and German benchmark bonds widening by 3-5 basis points. This minor impact may push the spread to approximately 50 basis points, a level comparable to two months ago after the French government revised its budget deficit estimates.
The downgrade places additional pressure on President Emmanuel Macron’s administration to clearly outline budget savings necessary to maintain deficit reduction plans. With the government aiming to reduce the public sector budget deficit from 5.1% to 4.1% of economic output next year, reaching the EU’s mandated ceiling of 3% by 2027 seems challenging. S&P’s forecast of a 3.5% deficit in 2027 raises concerns, echoed by the International Monetary Fund and national public finance watchdog, regarding the feasibility of meeting targets without concrete budgetary adjustments.
As France approaches the EU parliamentary election on June 9, the downgrade poses political challenges for President Macron’s party, given the far right’s lead in pre-election polls. Opposition parties are likely to exploit the downgrade to critique the government’s financial management. Moreover, the risk of no-confidence motions from opposition lawmakers underscores the need for Macron’s government to enhance transparency in outlining budget savings and deficit reduction plans.
The opposition’s reaction to the downgrade has been vociferous, with Marine Le Pen’s far-right Rassemblement National party emphasizing the alleged mismanagement of public finances leading to record taxes, deficits, and debts. Eric Ciotti of the conservative Les Republicains party condemned the government’s financial stewardship as evidence of poor management. Similarly, the far left La France Insoumise accused the government of using the downgrade to justify austerity measures and cuts to social protection.
S&P’s downgrade of France’s sovereign debt rating carries significant implications for both financial markets and political dynamics. The modest market reaction may be overshadowed by the political fallout, as President Macron’s government faces increased scrutiny over its deficit reduction strategy. The downgrade serves as a reminder of the challenges in achieving fiscal sustainability and underscores the need for clear and feasible budgetary adjustments to mitigate economic risks.