The agency justified its decision, notably by referring to a “large budget deficit and little progress” in reducing it, after three years of large public spending aimed at curbing the Covid-19 and inflation crises.
Friday’s downgrade by Fitch Ratings for France is expected to have few immediate repercussions for Paris.
What did Fitch Agency do on Friday?
Similar to the other two major rating agencies Moody’s and Standard & Poor’s, Fitch’s main activity is to assess the solvency of countries by assigning them a letter grade.
AAA is the best (maximum credit quality) and C or D is the worst (default) by the agencies.
On Friday, France’s rating was downgraded one notch to “AA-negative” versus “AA” previously.
The agency justified its decision, in particular, by referring to a “large budget deficit and little progress” in reducing it, after three years of large public spending aimed at curbing the Covid-19 and inflation crises.
In awarding the French debt, Fitch deemed it “AA” of “very good quality” and remained generally desirable and safe for investors, but downgraded it to last before “A” which equals “good quality” credit.
Although Fitch’s downgrade of France’s credit rating on Friday is of course not good for it, it remains less effective than losing the “AAA” score in the early second decade of the current century (Moody’s and Standard & Poor’s deprived Paris of this score in 2012, and Fitch in 2013).
“It was a leap into the unknown,” Anne-Laure Kechel, founder of Global Sovereign Advisory, a company specializing in state debt, told AFP in early March. “At the same time, we tell ourselves that some investors could be less involved” in buying French debt in the markets, she added.
Currently, Standard & Poor’s gives France an “AA” rating with a negative outlook, while Moody’s has assigned it an “AA2” rating, with a stable outlook. Thus, the two agencies have granted Paris the third best possible rating, provided that Standard & Poor’s will update its assessment on June 2.
Any repercussions for France?
The downgrade of France’s credit rating did not completely surprise investors, with Fitch Ratings agency attaching France’s “AA” rating to a “negative outlook”, paving the way for the downgrade.
French Finance Minister Bruno Le Maire reassured Saturday, reiterating to AFP the government’s desire to “pass structural reforms for the country.”
In its assessment, Fitch considered that the heightened social tension around pension reform “poses a risk to (French President Emmanuel) Macron’s reform programme.”
Le Maire added on Saturday regarding the debt issue, “Do not doubt our full determination to restore stability to the country’s general budget (…) and accelerate debt reduction, reduce the deficit and accelerate the reduction of public spending.”
Anne-Laure Kechel confirmed that France “did not lose investors” with its debt when it lost its credit rating “AAA” in 2012-2013. In fact, the agencies have downgraded many other European countries, which has reduced the gravity of the situation in the eyes of the markets.
“On the other hand, we know there is a riskier assessment: if we move to ‘A’, it is possible that some investors will hold back” from buying French debt, Kechel cautioned.
France in the middle
Compared to major European countries, France ranks low against Germany, which has an “AAA” rating according to the three main agencies, but Berlin is an exception.
Moody’s is threatening to downgrade Italy by one notch to classify its debt as highly junk.
Spain is also rated lower than France, while the Netherlands still enjoys the best possible rating from Moody’s, Fitch and Standard & Poor’s.
Regardless of their classification, all European countries face the same challenge since 2022, which is high interest rates, which increases the cost of sovereign debt.