The announcement was eagerly awaited with public accounts which slipped in 2024 leading France to a deficit of 170 billion euros, or more than 6% of GDP while 4.4% was forecast at the start of the year. As a reminder, the objective was to go down to 3%, the threshold required by the EU, by 2027. Such a slip is not a first in a country which has no longer experienced a balancing act since 1975 but the scale of which has been at the center of all French political attention since the start of the school year.
The heavily deficit trend is lasting in France but it took on a new dimension during the year. With his strict budget, the new Prime Minister Michel Barnier hopes to correct the situation by saving 60 billion euros in 2025. But he is only aiming for 3% in 2029.
Furthermore, and this is perhaps the most frightening point for the rating agencies, the political hostility displayed towards these economic measures in recent weeks does not augur well for a peaceful return to the right path. . The draft budget for 2025 under discussion in the National Assembly was indeed delayed this week and highlighted fractures, including within the small base of the relative majority supposed to support the government.
The International Monetary Fund (IMF) had already called on France this Wednesday for more clarity on the French budgetary recovery. The institution actually envisages that the French debt could reach 124.1% of GDP in 2029 and already 112.3% this year. In 2025, public debt would be close to 115% of GDP while the maximum set by the EU is… 60%.
“France is among the countries whose debt has increased considerably compared to the pre-pandemic level,” said Vitor Gaspar, director of the IMF’s budgetary affairs department. For him, it is absolutely necessary to show that “France keeps its debt under control, in a credible manner, and within the European framework”.
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A dangerous spiral
The situation is all the more worrying as these inevitable savings will necessarily cause a slowdown in growth and therefore an even greater drop in already disappointing tax revenues. One of the reasons why many voices are being raised to affirm that the forecasts of the new French government are still too optimistic. The rating agency Fitch already said at the beginning of October it forecast a 5.4% GDP deficit in 2025 while Michel Barnier promised 5%. This led Fitch to place its French debt rating unchanged (AA-) but with a negative outlook.
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We can clearly see the danger of this spiral. Especially since, as indicated in a note published this week by Eric Dor, director of economic studies at the IESEG School of Management at the Catholic University of Lille, shifts in grades towards certain lower categories can trigger “effects automatic thresholds on the demand for the country’s bonds by large investors.
Thus, the regulations of certain funds “very strongly limit, or even prohibit, the holding of sovereign bonds rated less than AA”. A possible future downgrade of French public debt to category A would therefore imply a drop in demand for French bonds on the markets. Furthermore, for this expert, a long-term reduction in France’s rating to A+ would cause an automatic and regulatory increase in the capital required by banks that hold French debt. “The banks would react by buying less public debt from France, which would lead to an increase in the rate of return required on the markets.”
Mechanisms which would therefore have consequences on the interest rates demanded by investors and would further increase the weight of debt interest in the French budget, already the second item this year behind education with more than 55 billion euros . This would make reducing annual deficits even more complicated…
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