As every year, the “big three” of financial rating agencies lift the veil on their assessment of the different countries, in order to give insight into trust investors depending on an economy, a political situation and the ability to repay sovereign debt. In addition to looking at economic, budgetary and monetary policies, the rating agencies also take into account parallel elements that can have major repercussions, such as the popularity of a government with its fellow citizens.
Fitch is one of these three agencies, along with Standard & Poor’s and Moody’s. For 2023, it has just downgraded France’s financial rating from AA to AA-. It’s very simple, over the past thirteen years, France has never experienced such a ranking. From 2010 to 2012, our country enjoyed a triple Abefore moving to AA+, assigned in particular by Fitch (the ratings can differ greatly depending on the rating agencies) and remaining at the AA rating from 2014 to Friday April 29, 2023.
So what could have changed between now and the past nine years? According to the Fitch agency, the limited growth prospects (0.2%) are far from the only reason. There is also the risk of seeing a second energy crisis next winter in the country, which would once again slow down the economy, just like the problem of the rise in rates which freezes investments and postpones projects. Inflation, which has greatly increased the price of food purchases, is also a hindrance to consumption more generally – and therefore to growth.
The counterproductive effect of the pension reform
What particularly caught the media’s attention was the agency’s point on current social movements. The “sometimes violent” protests by demonstrators over the pension reform played on the deterioration of France on the scale of financial scores. The Fitch report mentions “a political deadlock and social unrest that could lead to more expansionary fiscal policy or a reversal of previous reforms”.
Understand by this that the delay in the implementation of the pension reform and the potential reversal of the situation on the economic policy of President Emmanuel Macron could put impediments to current reforms aimed at reducing public debt and the deficit. For the Minister of the Economy Bruno Le Maire, this downgrading of the rating by Fitch is regrettable, while the agency “underestimates the consequences of the reforms”, he said in a press release. Reforms that he described as “structuring” for the country, and which will allow by 2024 for the deficit and 2027 for the debt to reverse the curves.
Fitch is nowhere near as big as Standard & Poor’s or Moody’s. His note will however have repercussions. If agencies only “give opinions”, their note is taken very seriously, both for investors and creditors. Therefore, a downgraded rating will tend to increase the financing cost of the country in question. Another problem: the notation a a “procyclical” effect, thus strengthening the situation of a country in the direction of the prognosis given by the agency. A real spiral.
The solution of reindustrialization
Investment in France did not wait for a deterioration in the financial ratings of the agencies to slow down. Monetary policy in these times of inflation has led to higher interest rates, with immediate effect of excluding startups from fundraising spectacular at several hundred million euros (or dollars). So as not to feel sorry for itself, France is taking the opportunity to review its innovation support policy by gradually returning to industrial projects (with the France 2030 plan).
The ambitions of the government with its new nuggets are also to push the biggest projects of the last ten years towards the capital market, namely the Paris Stock Exchange. It remains to be seen if this will be enough to motivate entrepreneurs to do not move abroad. Underwater, foreign investment funds continue to shop and raise capital in young startups. Wall Street remains still and always the best market place to reach an international influence too.
