(Bloomberg) -- French Prime Minister Michel Barnier won a minor reprieve in his battle to pass a budget and remain in power as S&P Global Ratings reiterated its assessment of the country’s debt.
In a statement on Friday, S&P said the euro area’s second-biggest economy remains resilient despite political uncertainty. It cited the impact of labor market reforms under President Emmanuel Macron, high private sector savings rates, exports and European Union membership.
The decision leaves France seven notches above junk on S&P’s scale at AA-, on a par with the Czech Republic and Slovenia.
“Rising political fragmentation is complicating fiscal governance, most notably by delaying the approval of a credible 2025 budget,” S&P wrote. “Nevertheless, our base-case expectation is that French authorities will move ahead with budgetary consolidation amounting to just under 1% of GDP next year as part of a medium-term plan to moderate high budgetary deficits.”
The decision provides some respite for France after the ratings firm downgraded in May. Days after that, the country was plunged into a prolonged political crisis when Macron declared snap elections. Last month, both Fitch and Moody’s responded to the turmoil by putting negative outlooks on their ratings and Scope downgraded.
The president had aimed to bring clarity with the ballot, but the gamble backfired as the National Assembly split between three feuding blocs: the left, a diminished center backing the president, and a strengthened National Rally led by Marine Le Pen.
At the same time, the government’s plans to repair public finances drifted further off course as tax revenues came in well below forecasts. When Macron appointed Barnier to lead a minority government in September, the budget deficit was predicted to reach 6.1% of economic output this year instead of falling to 4.4% as initially planned.
Barnier’s team is now trying to push through a 2025 budget to return the deficit to 5% next year with €60 billion ($63.3 billion) of tax increases and spending cuts. However, the entire project is cast into doubt as Le Pen’s lawmakers threaten to join leftists to bring down the government in a no-confidence motion as soon as next week.
The mounting political risks have put France’s bonds under renewed pressure over the past two weeks. The gap between French and German 10-year bond yields — a widely watched measure of risk — at one point hit 90 basis points, the highest level since 2012. That premium narrowed to 81 basis points in the final minutes of trading on Friday, as money markets priced in faster interest rate cuts from the European Central Bank.
In an attempt to survive as prime minister and preserve the budget, Barnier has made concessions that risk reducing the extent of fiscal consolidation France can achieve next year.
The National Rally has responded with further demands for modifications, and Le Pen has given the premier until Monday to adhere to her red lines before she decides whether to topple the government.
While S&P reiterated its rating on Friday, it said it now expects the budget deficit to end 2024 at about 6.2% of gross domestic product, which means the “starting point for France’s fiscal adjustment is a difficult one.” Beyond 2025, the fiscal trajectory is unclear, it added.
Finance Minister Antoine Armand said in a short statement following S&P’s decision that it reflected the government’s efforts to repair public finances, while underlining the risk associated with political uncertainty that would call into question that trajectory.
S&P said it could take negative action on France’s rating if “the government is unable to reduce its large budget deficits or economic growth falls below our projections over a protracted period.”
Barnier is set to face a no-confidence motion as early as Wednesday after he is expected to resort to article 49.3 of the constitution to adopt the 2025 social security bill without a vote. Even if he scrapes through, similar votes are likely later in December over the entire budget.
Still, S&P said France should be able to avoid a government shutdown if no budget is passed this year as a technical administration could still legislate a fiscal continuity law that would enable it to collect taxes and pay salaries — with spending capped at 2024 levels — until a budget is enacted early in 2025.
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Alice Gledhill.
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