France has been hit with yet another downgrade, the second in a single week, as the slow-motion train wreck of its politics continues to devour its public finances.
Morningstar DBRS cut the nation’s rating from AA (high) to a plain vanilla AA on Friday, just six months after slapping a negative outlook on it. The verdict? A toxic cocktail of political fragmentation, endless parliamentary gridlock and governments collapsing faster than one can count prime ministers.
“Rising political instability and the absence of consensus severely limit fiscal effectiveness,” the agency observed, in the understated way credit analysts often use when really saying: your politics are a mess and no one believes you can fix the deficit.
The timing is brutal. Only last week, Fitch also swung the axe, following the implosion of François Bayrou’s government over, you guessed it, budget cuts. Emmanuel Macron has now handed the poisoned chalice to Sébastien Lecornu, a 39-year-old tasked with producing a budget deal in a parliament where the only thing the opposition can agree on is blocking him. Tax hikes on one side, slower deficit reduction on the other, all wrapped in strikes and mass protests against austerity.
French debt was once considered a eurozone anchor. Now, the spread over Germany has nearly doubled since Macron’s snap election gamble last year. Investors have taken one look at Paris’s political theatre and demanded a risk premium more commonly associated with southern Europe. Even Portugal and Spain, traditionally the “fragile periphery”, are now rewarded with upgrades while France slides down the ladder. The irony writes itself.
DBRS warned of “high execution risks” in meeting deficit targets. To get to the (already modest) goal of 4.6% of GDP next year would require what they politely call “significant adjustment.” Translation: deep, unpopular cuts that no fragmented parliament will ever pass.
The business climate has duly soured. Confidence indicators are stuck near multi-year lows, households and firms are sitting on their wallets, and the Bank of France is forecasting slower growth ahead. Output surprised to the upside in the first half of the year, but no one’s betting on that lasting once the political circus resumes in full swing.
DBRS currently has a “stable” outlook for France; however, a downgrade could occur if structural imbalances are not addressed and debt ratios continue to rise towards 125% of GDP. This scenario is quite plausible given the current state of paralysis. The upcoming ratings reviews include Scope on September 26, Moody’s on October 24, and S&P on November 28. If any major agency issues another downgrade, France risks following in Italy’s footsteps, becoming a cautionary tale of once-strong economies reduced to pleading for patience from investors.
Macron, re-elected but politically neutered, now presides over a revolving door of prime ministers and deficit targets no one believes in. France isn’t just slipping down the ratings scale, it’s losing the very credibility that once allowed it to borrow cheaply even while preaching fiscal rectitude to others.
The eurozone’s second-largest economy is now paying a premium compared to Portugal. If that doesn’t sting in the Elysée Palace, nothing will.