Alarm over France’s fiscal situation grew on Friday after rating agency Moody’s issued a negative outlook on the country’s sovereign debt rating amid concerns over the country’s rapidly rising debt and budget deficit.
The outlook raises the risk of political gridlock in France as Prime Minister Michel Barnier struggles to get a newly elected and deeply divided parliament to pass an austerity budget, Moody’s said. It reflects that.
France’s debt and deficit have ballooned, making it one of Europe’s most financially distressed countries. The European Commission threatened sanctions, including the imposition of spending limits, for breaching the region’s fiscal discipline rules.
“The decision to change the outlook from stable to negative reflects the increasing risk that the French government is unlikely to take steps to prevent a continuation of higher-than-expected budget deficits and a worsening of its debt-paying capacity,” Moody’s said in a statement. ” he said. “The fiscal deterioration we are already seeing is beyond our expectations.”
The rating could have been worse. Moody’s has decided to leave the rating of French government bonds unchanged at Aa2. However, it is unclear how long that evaluation will last.
Last week, Fitch Ratings issued a negative outlook on France’s sovereign rating. Fitch maintained its rating at “AA-” but warned that the rating could be revised down if the government’s budget is not passed. A decline in credit ratings could increase borrowing costs, putting further strain on government finances.
Barnier is pushing a budget that would save 60 billion euros ($65 billion) next year through higher taxes on the wealthy and corporations and deep cuts to social programs and government spending. But the measures are already on the rocks, with left-wing parties this week seeking new taxes worth billions of euros and right-wing parties calling for even bigger spending cuts.
Pressure is mounting as international investors have pushed France’s borrowing costs to the highest level in nearly a decade as President Emmanuel Macron seeks to offset political risks that have taken root in the country after a snap election in the summer. The inconclusive result leaves Mr Barnier in a vulnerable position with no political majority in parliament.
“The current political situation in France is unprecedented, raising risks to the institution’s ability to achieve sustainable deficit reduction,” Moody’s said.
Lawmakers are expected to vote next week on a tax increase that would raise 20 billion euros. If the bill fails to pass, Mr. Barnier may be forced to pass the budget through executive order. If that happens, Congress could pass a motion of no confidence, potentially leading to the collapse of the government.
France’s economy, the second largest of the 20 countries that use the euro currency, is considered too big to fail. The European Union requires sound public finances from its member states, with a debt ceiling of 60% of economic output and a rule that government spending cannot exceed revenue by more than 3%. .
France has already surpassed these restrictions, and the government says it is urgent to pass an austerity budget. France’s debt has soared to 3.2 trillion euros, equivalent to 112% of economic output, making it the worst among euro users after Greece and Italy. This year’s annual budget deficit is expected to widen to 6.1% of gross domestic product (GDP), significantly higher than expected and up sharply from last year’s 5.5%. Moody’s said the government is unlikely to meet its reduction target next year.
Moody’s issued a warning in June about France’s national debt, saying Macron’s gamble to call for a dissolution of parliamentary elections could lead to a politically torn government unable to rein in public finances or pass other important legislation. He said there is. The danger is that France’s large debt pile could grow even further, and interest payments could rise faster than expected.
In May, Standard & Poor’s, the third largest credit rating agency, downgraded France’s debt rating, upsetting a government for which economic confidence is one of its main political assets.
Hundreds of new tax increase amendments being proposed by opposition parties are raising new political hurdles. Lawmakers on Friday approved a bill from the far-left party France Indomitable that would impose a new 2% surcharge on billionaires, a rebuke from France’s budget minister who warned it could drive wealthy investors away from France. received.
And Mr Macron, who has been silent for weeks on the budget storm after previously failing to win a majority for his party and losing influence in the new parliament, said in remarks Friday at a French business trade fair. He warned that too many new taxes would have a negative impact on France’s international competitiveness.
He said France needed to win the “macroeconomic battle” and that “France thinks it is solving its budget deficit problem by raising taxes, raising labor costs and reversing a coherent macroeconomic policy. All these things are impossible,” he added.
