Europe-based credit rating agency Scope Ratings has downgraded France's credit rating outlook from stable to negative due to weakening public finances and risks associated with the implementation of economic reforms. The downgrade comes on the heels of another downgrade by Fitch Ratings in the previous month that lowered France's rating to AA- from AA. The two credit rating agencies cited similar reasons, including a high government debt burden and the risk of political deadlock after the protests over pension reform that could hamper France's ability to implement future economic overhauls.
The latest downgrade from Scope Ratings has further heightened concerns over the challenges France faces in reducing its budget deficit and shrinking its debt burden, which surged during the Covid pandemic. The French government has outlined a long-term plan to reign in the deficit, boost economic growth, wind down fiscal support, and contain the increase in spending below inflation. However, critics have cautioned that the plan may rely too heavily on optimistic growth and inflation forecasts, which could lead to even higher debt levels.
Scope Ratings warned that they may further downgrade France's credit rating if the public debt ratio steadily increases, or if the growth outlook deteriorates significantly due to inadequate fiscal consolidation. The rating agency also pointed out that France faces high expenditure pressures and an increasing interest rate burden, which could further exacerbate the debt burden. Additionally, the uneven track record of fiscal consolidation and a lack of government majority at the National Assembly further increase the risks of postponing or watering down vital economic overhauls.
While Scope Ratings is not among the major credit rating agencies, it is recognized by the European Securities and Markets Authority and has applied for recognition in the European Central Bank's credit assessment framework. The next credit rating agency, Standard & Poor's, is scheduled to take rating action on France a week after Scope Ratings' downgrade. The French government faces a daunting task of reducing expenditure, boosting growth, and implementing ambitious economic overhauls against a backdrop of social unrest and political uncertainty.