Nine days before the European elections, the French government faced a setback last Friday as Standard & Poor’s (S&P) downgraded France’s sovereign debt rating from “AA” to “AA-” for the first time since 2013. This downgrade reflects the agency’s doubts about France’s ability to reduce its deficit below 3% by 2027. This decision is a significant political blow for the government just days before the European elections.
The Importance of Sovereign Ratings
Sovereign ratings, such as those issued by S&P, assess a country’s ability to repay its debts. Lenders rely on these ratings to estimate risks and set interest rates. A good rating mitigates the risk of default and bolsters investor confidence. The highest rating, AAA, signifies exemplary financial management, while the lowest ratings, like C or D, indicate a high risk of default.
Justifying the Increased Debt
Bruno Le Maire, Minister of the Economy, explained in a video posted on X that this downgrade is due to the increase in France’s debt level. He defends this rise as a necessary decision to save the French economy in the face of the Covid-19 and inflation crises. The downgrade from “AA” to “AA-” is not a first for France, as Fitch already lowered its rating in April 2023 due to “significant budget deficits and modest progress” in reducing them.
International Comparison
Compared to other developed countries, France is in the middle of the pack. It is rated lower than Germany (AAA) or Austria (AA+), but higher than Spain (A) or Italy (BBB). This relative position reflects ongoing budgetary challenges despite efforts to reduce deficits.
Impact on Borrowing and Daily Life
The Minister of the Economy assured the French public that this downgrade would not directly impact their daily lives. However, a lower rating potentially means higher borrowing costs for France, which could have longer-term repercussions.
Downgrades in the Baltic States and Improvement in Ireland
Besides France, S&P also downgraded the ratings of the three Baltic states – Estonia, Latvia, and Lithuania – due to the impacts of the war in Ukraine and geopolitical risks with Russia. Estonia’s rating dropped from “AA-” to “A+”, Latvia from “A+” to “A”, and Lithuania from “A” to “A-“, with stable outlooks. Additionally, Fitch upgraded Ireland’s rating from “AA-” to “AA,” praising the country’s strong budgetary performance.
In conclusion, S&P’s downgrade of France’s sovereign debt rating is a wake-up call for the government, highlighting the economic and budgetary challenges that must be addressed to restore investor confidence and ensure sustainable financial management.
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