France’s Financial Morass Produces a Harsh Critique From Moody’s
Warnings over France’s financial situation grew on Friday when the Moody’s ratings agency issued a negative outlook for the country’s sovereign debt rating amid concerns about the nation’s rapidly rising debt and deficit.
The outlook reflects what Moody’s said were heightened risks 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.
France has become one of the most financially troubled countries in Europe, with a ballooning debt and deficit. The European Commission has threatened sanctions, including enforced limits on spending, for breaching the bloc’s fiscal discipline rules.
“The decision to change the outlook to negative from stable reflects the increasing risk that France’s government will be unlikely to implement measures that would prevent sustained wider-than-expected budget deficits and a deterioration in debt affordability,” Moody’s said in a statement. “The fiscal deterioration that we have already seen is beyond our expectations.”
The assessment could have been worse; Moody’s decided to keep its Aa2 rating on France’s debt. But it was unclear how long that rating will continue.
Last week, Fitch Ratings issued a negative outlook for France’s sovereign credit rating. Fitch left the rating at AA– but warned that it could be revised lower if the government’s budget didn’t pass. Lower credit ratings can force borrowing cost higher, further straining a government’s finances.
Mr. Barnier is pushing a budget proposal that would provide 60 billion euros ($65 billion) in savings next year through tax increases on the rich and businesses and big cuts to social programs and government spending. But the measure has already been clawed apart, with left-leaning parties trying this week to tack on billions of euros’ worth of new taxes and right-leaning parties seeking bigger spending cuts.
Pressure is high, with international investors driving France’s borrowing costs to their highest level in nearly a decade to offset the political risk that settled into the country after President Emmanuel Macron called snap elections in the summer. Their inconclusive results have left Mr. Barnier vulnerable, with no political majority in Parliament.
“The current political situation for France is unprecedented, and it raises risks about the ability of the institutions to deliver sustained deficit reductions,” Moody’s said.
Lawmakers are scheduled to vote next week on tax increases that would raise €20 billion. If they don’t pass, Mr. Barnier might be forced to push through the budget with an executive order. That could prompt a vote of no confidence in Parliament and potentially cause a collapse of his government.
France’s economy — the second largest among the 20 countries that use the euro currency — is considered too big to fail. The European Union requires members to have sound finances, with debt capped at 60 percent of economic output and a rule that government spending may not exceed revenues by more than 3 percent.
France has already blown past those restrictions, and the government says passage of the austerity budget is urgent. France’s debt has jumped to €3.2 trillion, or 112 percent of economic output, the worst among countries using the euro after Greece and Italy. The annual budget deficit is set to widen to 6.1 percent of gross domestic product this year, much higher than expected and a rapid increase from 5.5 percent last year. Moody’s said the government was unlikely to meet a target for lowering it next year.
Moody’s issued a warning on France’s sovereign debt in June, saying Mr. Macron’s gamble to call for snap parliamentary elections could give rise to a politically torn government incapable of reining in finances or passing other critical legislation. The danger is that France’s high debt balloons even further, which could lead to a faster-than-expected rise in interest payments.
In May, Standard & Poor’s, the third major credit rating agency, downgraded France’s debt rating, rattling the government, whose economic credibility has been one of its main political assets.
Hundreds of new tax-increase amendments being proposed by opposition parties have raised fresh political hurdles. On Friday, lawmakers approved a measure by the far-left France Unbowed party to impose a new supplementary 2 percent tax on billionaires, drawing a rebuke from France’s budget minister, who warned that it could lead wealthy investors to shun France.
And Mr. Macron, who had been silent for weeks about the budget storm after losing influence in the new Parliament without his party’s previous majority, warned on Friday in remarks to a French business trade show that too many new taxes would harm France’s international competitiveness.
Saying France needed to win a “macroeconomic battle,” he added: “All this is not possible if we increase taxes and the cost of labor and think we are solving the problems of the public deficit by overturning coherent macroeconomic policy.”