Macron Faces Fresh Test as Outlook for French Finances Dims

A series of warnings about France’s finances have added a new challenge to President Emmanuel Macron’s list of challenges following riotous nationwide protests over pension policy.

S&P Global warned on Friday that it still has a negative outlook on France’s credit quality. That fell short of the downgrade some had expected, but came after two other rating agencies downgraded the country’s rating over the past month.

S&P Global maintained its investment-grade rating for France, a decision that Mr Macron’s government had been waiting for. But the ratings agency, in reiterating its negative outlook first published in January, raised concerns about France’s ability to restrain its fiscal budget at a time when general government debt is already soaring.

And it has heightened concerns among analysts about Mr Macron’s ability to advance his efforts to boost the country’s competitiveness and growth in a tense social and political climate.

France’s Finance Minister Bruno Le Maire said in an interview published in the Journal du Dimanche late on Friday that he saw the announcement as a “positive signal”, adding that “our country’s fiscal strategy is clear”. added. It’s ambitious. And it is believed. “

At the end of April, the Fitch Rating was cut France’s sovereign credit rating was upgraded by one notch to ‘AA–’ after a downgrade in December. Scope Ratings, a European agency, evaluation of France last month.

France’s economy, the second largest in the Eurozone, forecast The country’s fiscal situation is a bigger concern for rating agencies, although it is expected to remain subdued until at least next year. France has spent billions to protect households and businesses from the inflationary crisis and painful lockdowns caused by the pandemic.

Debt soared to 111 percent of economic output, putting France in the same club as major eurozone economies Greece, Italy, Portugal and Spain. highest debt ratio. In Germany, Europe’s largest economy and a stickler for fiscal discipline, the debt burden accounts for 66% of economic output.

S&P Global said it could downgrade France’s credit rating within the next 18 months if debt did not reduce, and the risk would be if the economic slowdown persisted or if France failed to properly curb government spending. He said it would increase.

The government is concerned about a potential downgrade, and was sensitive enough to have Lemaire and French Prime Minister Elisabeth Borne recently meet with S&P representatives to pursue the allegations. S&P had notified France in January of a potential downgrade.

“From Bruno Lemaire to Standard & Poor’s we have had detailed explanations of everything we do to manage our finances,” Borne told a French radio station last week. “I explained the goals of France’s reforms and deficit reduction,” he said.

Lemaire said boosting economic growth was the best way to pay off the debt. But with the economy expected to grow just 0.8% this year, the government is scrutinizing the budget and offsetting it to curb spending growth.

Ratings agencies have expressed concern that potential political stalemate and social unrest pose risks to Mr Macron’s policies. Nationwide demonstrations, many of them violent, erupted after he invoked executive power to bypass parliament to force a bill to raise France’s legal retirement age from 62 to 64, but public opinion Nearly three-quarters of voters opposed it in the poll.

Macron, who lost his parliamentary majority in April’s re-election, said the ruse was necessary to keep the pension system from slipping into the red and generate €17 billion ($18.2 billion) in savings over the next few years. Fitch and S&P Global approved this as a moderately positive development.

But S&P Global warned that “political divisions” under Mr Macron’s watch have cast doubt on his government’s ability to implement policies to boost growth and curb the budget deficit.

Critics of Mr Macron see his exercise of executive power as an abuse of power and have vowed to continue the fight over other measures he plans to launch. Opponents continue to harass the president and his cabinet members, including banging pots and pans during public visits.

Mr Macron has tried to show that he is looking to get France back in business quickly after the turmoil and polish its image. Last month, he hosted 200 global chief executives at Versailles, including Elon Musk, Disney’s Robert A. Iger and steel magnate Lakshmi Mittal. business conference It pulled out a new investment pledge of €13 billion in France.

The move is part of a plan by the former investment banker, Macron, to revitalize the French economy by attracting new investment and pushing the push towards green industries, part of which is to include foreign investment. It spends generously on subsidies to attract companies and discourage the relocation of French companies. work abroad.

Since taking office in 2017, Mr Macron has cut business taxes and made it easier to hire and fire workers. The new rules, which encourage unemployed people to look for work, are a controversial move that could save more than €4 billion and in theory help address labor shortages. And in 2022, for the fourth year in a row, France will be the European country that attracts the most foreign investment, according to a survey. investigation Manufactured by EY (formerly Ernst & Young).

S&P Global said it expects labor market performance and the French economy as a whole to “continue to benefit from the reforms implemented over the past decade”.

But these developments have not allayed concerns about the French government’s ability to repay the enormous costs it has accrued.

France’s public debt soared as Mr Macron spent nearly €5 trillion to prop up the economy during the coronavirus pandemic. That amount now stands at nearly €3 trillion, and debt servicing costs, which were low during the pandemic, have recently skyrocketed with inflation. About a tenth of all bonds issued by the French government are indexed to inflation, ballooning the country’s bills. . Rising interest rates by the European Central Bank are also adding to the pressure.

Overall, France’s debt burden, or the amount of interest owed, jumped from $31 billion two years ago to €42 billion in 2022. The government expects this figure to rise to €60 billion by 2027, the same amount as the national education budget.

“A lot of money has been spent to support the economy, people and businesses,” said Charlotte de Montpellier, a French analyst at ING Bank. She said, “It worked well when the economy was good, but our finances have been severely affected.”

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