2023-04-29 13:02:43
In its latest analysis note, the rating agency Fitch estimates that social tensions linked to the pension reform will complicate the consolidation of public accounts.
A degradation which must have made Bercy cringe. The rating agency Fitch lowered France’s rating by one notch from AA to AA-, with a stable outlook, on Friday 28 April. The agency justifies its decision by the worsening of the debt and the budget deficit, but also by the social tensions around the pension reform. The Minister of Economy and Finance, Bruno Le Maire, regrets this “pessimistic assessment”, estimating that Fitch “underestimates the consequences of the reforms” implemented by the government. Franceinfo explains this decision, its reasons and its effects.
1 What is a rating agency?
Rating agencies are private companies in the financial sector, which assess the solvency risk of a company, a State, a local authority or a financial operation. To do this, they establish forecast scenarios to measure the ability of an entity that borrows money to repay its debt.
The three main agencies are Moody’s, Fitch and Standard & Poor’s. Each operates according to its own scoring system and its own criteria, butn general, the higher the score, the lower the risk. The AAA rating indicates very good solvency, BBB average solvency, CCC a very high risk of non-reimbursement. A D rating means the borrower is bankrupt.
2 What does the AA- rating from Fitch mean?
In his avis (in English), the Fitch agency indicates that its note relates to the long-term debt of France, namely the sovereign loans that the French State can contract on the financial markets. The AA- rating corresponds to the lowest notch assigned to so-called debt “high quality”, that is to say with a very low risk of non-payment, specifies Fitch in its reference document (PDF in English). In other words, despite the downgrading of its rating, French debt is still considered safe.
Moreover, at present, the agencies S&P (AA with negative outlook) and Moody’s (Aa2, stable outlook) both attribute the third best possible rating to France. The first must update its rating on June 2.
3Why has France seen its rating lowered?
The Fitch agency puts forward economic criteria, such as the size of the state deficit (5% of GDP in 2023) and sluggish growth (0.8% expected in 2023, according to Fitch). France’s level of indebtedness (nearly 111.6% of GDP at the end of 2022), is also the highest country to receive an AA rating, notes Fitch. This while the debt burden, that is to say the interest paid for loans, increased by 15.2 billion last year.
The agency also considers ongoing social mobilization. THE “tensions” around the pension reform might “complicate fiscal consolidation” by the state, according to Fitch. Taking into account the social climate “is something quite new. It’s a very particular situation and ultimately Fitch gave social tensions a negative premium”estimates the economist Mathieu Plane, on franceinfo.
4 Does this mean that the pension reform has failed to reassure the markets?
If Fitch recognizes in the reform an effect “moderately positive” on French spending, she believes that “political deadlock and social movements” resulting from his challenge pose a “risque”. “It’s quite surprising because in general the markets are usually fond of reforms”, note Anne-Sophie Alsif, chief economist at the audit and consulting firm BDO. “Fitch issued an unfavorable opinion, because a question arises on the capacity of Emmanuel Macron, given the social climate, to pass other reforms”.
“The rating agency is going in the same direction as us”, reacted the deputy of rebellious France Eric Coquerel, Saturday on franceinfo. Fitch’s decision “is one more element in our criticism of this reform and the way the government is managing it. To my knowledge, this is the first time that a rating agency, which is a bit like the arbiters of finance , sanctions a government for ‘political deadlock and social movements that pose a risk to Emmanuel Macron’s reform agenda.’ This is what we have been saying for a long time. This reform will not bring much in terms of deficit reduction and will provoke social and popular anger.”
5 What are the possible effects of the downgrading of the French rating?
Theoretically, a lowering of a country’s rating leads to an increase in the cost of its borrowings on the market. For France, however, in the short term, the effects of this decline should be limited. “This is a first alert but the other two agencies, Moody’s and Standard & Poor’s, have not yet changed their ratings”, notes Stéphanie Villers, economist at PricewaterhouseCoopers France. “There has not been a major downgrade, the market response should remain fairly marginal and France will still be able to borrow,” adds Anne-Sophie Alsif. “However, we should avoid further deterioration in the four years that follow. There would then be greater impacts on the burden of our debt”warns the BDO economist.
“I believe that the facts invalidate the assessment of the Fitch agency. We are able to pass structural reforms for the country”reacted once more Bruno Le Maire, Saturday with AFP, citing the reform of unemployment insurance and that of pensions.
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