Bankinter | S&P confirms the AA-/A-1 rating of France, but downgrades the Outlook from Stable to Negative. It cites a weakening of public finances. The Budget for 2025 has been approved and proposes a reduction of the deficit of 0.4% of GDP, but the fiscal strategy from 2025 is uncertain. In addition, S&P forecasts GDP growth of <1% in 2025, making the goal of fiscal consolidation even more difficult. In 2028, S&P estimates that the average cost of French public debt will be equal to the nominal growth of GDP, which means that, in order to reduce the percentage of public debt to GDP, the country will have to generate a primary surplus (excluding interest payments), which it has not managed to do since 2001.
Analysts’ view: Given the pressures on French public finances and the government’s fragility when it comes to implementing reforms and fiscal consolidation measures, S&P has downgraded France’s rating outlook to Negative. The risk premium of the French bond against the Bund stands at 74 bp versus 53 bp in December 2023, and even exceeds the Spanish one (63 bp currently; 97 bp in December 2023).
On the other hand, the rating agency S&P raised Portugal’s rating to A from A- and assigned a positive outlook, placing it at the sixth highest level on its scale. S&P emphasises that Portugal will achieve slight budget surpluses between 2025 and 2028 and will reduce public debt as a percentage of GDP faster than most European countries. The agency also points out that, although the commercial and geopolitical environment is uncertain, the reduction of external debt and current account surpluses improve the country’s external profile. The agency expects the government’s policies to be implemented in a stable manner, despite the fragmented parliament, and considers a scenario of early elections in 2025 unlikely.
Analysts’ view: The positive outlook reflects the government’s implementation of sound fiscal policies and the improvement in the external position of the economy. This rating upgrade comes after the August 2023 review, when S&P decided to maintain the rating at A-, after raising Portuguese debt to the ‘club’ of A. S&P is the second rating agency to review Portugal’s debt this year, after DBRS also raised its rating to A in January.
