S&P: France's fiscal outlook faces huge challenges, lowers credit rating outlook to negative

Standard & Poor's Global Ratings has downgraded its outlook on France's credit rating from stable to negative, highlighting that despite long-term political instability, there still exists uncertainty in France's fiscal situation. The rating agency stated in a late Friday statement that the change in outlook reflects "rising government debt amid a more uncertain economic growth outlook and weak political consensus on addressing France's substantial potential budget deficits." Standard & Poor's maintained France's AA- rating, seven notches above junk level and in line with the ratings of the Czech Republic and Slovenia. At the time of Standard & Poor's decision, France had passed its 2025 budget this month, following a tough parliamentary battle that had led the government to collapse in December last year. The final fiscal bill aims to reduce the deficit as a percentage of economic output from an estimated 6% in 2024 to 5.4% this year, a smaller adjustment compared to the initial plan of 5%. The French Finance Ministry stated in a release that the 2025 budget marks a "historical turning point" in efforts to reduce the budget deficit and control debt. The Finance Ministry stated: "The negative outlook reminds us of the extent of challenges facing public finances, challenges that the government is determined to tackle." Even with the budget now finalized, the threat of another government collapse in France remains as Prime Minister Francois Bayrou lacks a majority in the National Assembly. Tensions with the opposition could resurface in the coming months as lawmakers debate potential reforms to the pension system and a controversial law to increase the minimum retirement age from 62 to 64 in 2023. Earlier this month, France's National Auditor warned of a significant expansion of the deficit in the public pension system in the coming years, issuing a warning before negotiations. Standard & Poor's projects that France's GDP growth rate this year will fall below 1%, further straining the fiscal outlook. The spread between French and German 10-year bond yields is closely watched as a risk indicator, fluctuating between 70-80 basis points since French President Emmanuel Macron announced early elections in June last year. The yield spread had reached 90 basis points before, close to levels hit during heavy sell-offs last year when Michel Barnier's former government collapsed following a vote of no confidence. Political and fiscal uncertainties have damaged France's ratings, with Moody's unexpectedly downgrading France's ratings in December last year. In late May, just before the French parliamentary elections, Standard & Poor's downgraded France's credit rating. Standard & Poor's stated that if the French government fails to further reduce its large budget deficit in the next two years or if the economy grows below Standard & Poor's forecasts for a prolonged period, it may take further negative actions on France's rating.