France downgraded one notch

Figure 1: Net Government Debt/GDP

Source: IMF

Excess Debt Catching Up With France

Fitch downgrade rationale includes two key themes. Firstly, that the social unrest surrounding pension reform will likely make it more difficult for the government to consolidate government debt/GDP. With Macron's government being unpopular, plus weak growth for now, it will be difficult for France to tighten fiscal policy enough. Whether social unrest last is however more uncertain and a window for some tightening could open in 2024, though the government true intentions will only become clear in the autumn.

Secondly, Fitch were worried about the deficit and debt trajectory multi-year. The IMF projections are that net government debt/GDP will drift upwards in the coming years in contrast to the mild move down in the EZ (Figure 1). Part of the reason is that France runs a persistent primary budget deficit, as France has used it privileged position within the EZ to run moderate budget deficits. We have recently highlighted that since 2007 that France's total non financial debt/GDP (government/households and firms) has run up by 118% of GDP (Figure 2). Government and firms caused the main rise in debt, but it does mean that French growth has benefitted from a debt surge (here) that is unlikely to be repeated in remainder of the decade as France total non-financial sector debt is now 2nd only to Japan for major countries.

Figure 2: Change in Total Non-Financial Sector Debt/GDP Since Q1 2007 (%)

Source: BIS (data to Q3 2022)

S&P and Moody's have France one notch higher than Fitch and risks remain of a downgrade from the other major agencies in the coming quarters.