(Bloomberg) -- S&P Global Ratings put a negative outlook on its assessment of France’s creditworthiness, underscoring enduring uncertainty over the country’s finances after a prolonged period of political turmoil.
The change in outlook reflects “rising government debt amid weak political consensus for tackling France’s large underlying budget deficits, against a backdrop of more uncertain economic growth prospects,” the ratings firm said in a statement late Friday.
S&P kept its AA- rating on France, seven notches above junk and in line with the Czech Republic and Slovenia.
S&P’s decision comes as France adopted its 2025 budget this month after an arduous parliamentary battle that triggered government collapse in December.
The final finance bill aims to bring the deficit to 5.4% of economic output this year from an estimated 6% in 2024 — a less ambitious adjustment than the initial plan of a reduction to 5%.
The French Finance Ministry said in a statement that the 2025 budget marks a “historic turning point” in efforts to reduce the budget deficit and control debt.
“The negative outlook is a reminder of the size of the challenge of repairing our public finances, a challenge the government is determined to rise to,” the ministry said.
S&P expects France’s GDP growth to fall below 1% this year, further straining the fiscal outlook.
Flash Points
Even with a budget finalized, the threat of another government collapse remains as Prime Minister Francois Bayrou lacks a majority in the National Assembly. Tensions with opposition parties are likely to return in the coming months when lawmakers debate potential changes to the pension system and the contested 2023 law that raised the minimum retirement age to 64 from 62.
France’s state auditor said earlier this month that the public pension system’s deficit is set to widen sharply in coming years, sounding a warning ahead of negotiations.
The gap between French and German 10-year bond yields, a closely-watched gauge of risk, has largely traded between 70 to 80 basis points since June, when President Emmanuel Macron called snap elections. It neared 90 basis points at the height of last year’s selloff, when the former government — led by Michel Barnier — collapsed following a no-confidence vote.
What Bloomberg Economics Says...
“Achieving a fiscal consolidation of close to 6% of GDP over seven years is ambitious. France last demonstrated strong budget discipline in the 1990s, when it consolidated by 4.9% of GDP over seven years while preparing to join the euro area. Replicating that success will be difficult, particularly with growing spending pressures due to an aging population.”
—Eleonora Mavroeidi and Antonio Barroso. For full insight, click here
The political and fiscal uncertainty has already harmed France’s ratings, with Moody’s delivering an unscheduled downgrade in December. S&P cut its France rating at the end of May last year, just before the parliamentary election that delivered a National Assembly with no clear majority.
S&P said it could take further negative action on France’s rating if the government cannot reduce its large budget deficits further over the next two years, or if economic growth falls below S&P’s projections over a protracted period.
--With assistance from Alice Gledhill and Hari Govind.
(Updates with Bloomberg Economics after eighth paragraph)