Like the other two major rating agencies Moody’s and Standard & Poor’s, Fitch’s core business is to assess the creditworthiness of countries by assigning them a letter grade.
AAA is best, meaning maximum credit quality, and C or D is worst, indicating the agency’s probability of default.
On Friday, France’s rating was downgraded by one notch to “AA-negative” against “AA” previously.
The agency notably justified its decision by evoking a “significant budget deficit and little progress” to reduce it, after three years of large public expenditure aimed at curbing the Covid-19 and inflation crises.
In allocating French debt, Fitch deemed it “AA” of “very good quality” and remained generally desirable and safe for investors, but downgraded it to last before “A” which equates to credit of good quality”.
If the downgrading of France’s credit rating by Fitch on Friday is of course not good for it, it remains less effective than the loss of the “AAA” degree at the beginning of the second decade of the current century, when Moody’s and Standard & Poor’s deprived Paris of this diploma in 2012 and Fitch in 2013.
Anne-Laure Kechel, founder of the Global Sovereign Advisory company specializing in state debt, told AFP in early March that the decision was “a leap into the unknown”.
“At the same time, we think that some investors could be less involved” in the purchase of French debt on the markets, she added.
Currently, Standard & Poor’s assigns France an “AA” rating with a negative outlook, while Moody’s assigns it an “AA2” rating with a stable outlook.
Thus, the two agencies granted Paris the third best possible rating, provided that Standard & Poor’s updates its assessment on June 2.
repercussions for France
France’s credit rating downgrade didn’t come as a complete surprise to investors, with Fitch Ratings associating France’s ‘AA’ rating with a ‘negative outlook’, paving the way for the downgrade.
French Finance Minister Bruno Le Maire reassured AFP on Saturday by reiterating the government’s desire to “pass structural reforms for the country”.
In its assessment, Fitch said the serious social tension around pension reform “poses a risk to French President Emmanuel Macron’s reform agenda”.
The Mayor added on Saturday regarding the debt issue: “Do not doubt our full determination to restore the stability of the general budget of the country and to accelerate the reduction of the debt, to reduce the deficit and to accelerate the reduction of public expenditure. “.
Anne-Laure Kechel confirmed that France “did not lose investors” with its debt when it lost its “AAA” credit rating in 2012-2013. In fact, the agencies downgraded many other European countries, which lessened the seriousness of the situation in the eyes of the markets.
“On the other hand, we know that there is a riskier assessment: if we go to ‘A’, it is possible that some investors will refrain” from buying French debt, warned Kechel.
France in the middle
Compared to major European countries, France ranks low against Germany, which has an “AAA” rating according to the three main agencies, but Berlin is an exception.
Moody’s is threatening to downgrade Italy one notch to classify its debt as highly undesirable.
Spain is also rated lower than France, while the Netherlands still enjoys the best possible rating from Moody’s, Fitch and Standard & Poor’s.
Regardless of their classification, all European countries have faced the same challenge since 2022, namely high interest rates, which increase the cost of sovereign debt.
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