Bond yields on French debt stayed the same on Monday, even though S&P Global Ratings lowered the country’s rating by one notch because it raised its estimate of the country’s budget deficit.
Both the 2-year and 10-year French bonds saw their yields go up and down. The 2-year bond’s yield went up to 3.16% from 3.15%, and the 10-year bond’s yield went down to 3.12% from 3.13%.
S&P lowered France’s rating from AA to AA- because the country’s December estimate of a 4.9% budget deficit for 2023 was much lower than the 5.5% of GDP that S&P knew it would be. That’s because taxes didn’t bring in as much money as expected, and the country still spent the most as a share of its GDP.
“France hasn’t done a good job of drawing down its budget over the last few decades,” S&P said. “Political fragmentation makes it less certain that the government will be able to keep putting in place policies that boost economic growth and fix budgetary problems.”
Since France has an election for the European Parliament on June 9, President Emmanuel Macron has always said that taxes will not go up.
The most important new number in S&P’s downgrade is that it predicts France’s budget deficit will reach 3.5% of GDP in 2027. This is higher than the government’s revised deficit target of 2.9% in its 2024 Stability Programme update and, more importantly, higher than the EU’s 3% requirement.
S&P said that France’s general government debt-to-GDP ratio is now the third highest in the euro area, following Greece and Italy.
In April 2023, Fitch lowered France’s rating to AA-. This is what Moody’s says about France: Aa2, which is the same as AA.
Citi economists, led by Michael Nies, say they don’t think S&P will lower France’s rating any further. S&P doesn’t think so either, since the outlook is “stable.” However, Moody’s may now lower France’s rating by one level.
“As a base case, we mostly agree with the scenario. Our own predictions are a little less optimistic than S&P’s, but not by much, and over a period of years, they are likely to be well within the range of error.” “We also feel some resistance from ratings in general at the point where they go from ‘double A’ to ‘single A,’” the Citi team said.
