Fitch notation agency has announced that the France would been downgraded to AA-. The two other agencies, Moody’s and Standard and Poor’s would inform of their decision before next summer but it would be surprising if none of these two doesn’t do the same. It is the third downgrading since France has lost its AAA in 2012, following the crisis of the euro. Reasons given by the agency refer, along with the public deficit and indebtedness, to the deterioration of the social climate which would make more difficult the adoption of the new measures, necessary to reduce these deficits and to offer enough guarantees to the bonds subscribers.

To reimburse the mid and long-term bonds coming at maturity in 2023, the State will have to issue new bonds for an amount of 150 billion, an amount which will have to be added to the financing of the current year budget deficit, evaluated at 165 billion, so a total of 315 billion. The first consequence of this downgrade will be to increase the spread with the reference countries like Germany. On the 10 years maturity, it had, since the beginning of March, overpassed 50 basis points. It is so highly likely that the 60 basis points will be overpassed during May.

Along with avoiding to give an opinion regarding France political choices, the agency is skeptical about the ability of the country to recover a growth rate allowing it to showing the necessary resources if not to eliminate but at least to slow the State recourse to indebtedness. The growth forecast for 2023 and 2024 is extremely low and even if it favorably compares to the German one, there is no reason to satisfy about it because the two countries are definitely not in the same financial situation. The supply side policy which for ten years constitutes the foundation of the project aimed at restoring the country economic and financial equilibriums has failed, as it is shown by the disastrous evolution of the foreign trade and the increase of the public indebtedness. Regarding the number of jobseekers in the whole France, it is still superior to three million according to the last published figures.

The second consequence of that downgrading will be a new increase of the charge of the public debt which will be added to that one resulting from the rates increase and of the repercussion of the inflation on the share of the debt which is indexed. In 2022, the charge of the interests on the mid and long-term bonds was 33.2 billion, the cost of the indexation of the bond coming at maturity was 4 billion and the interests on the Treasury Bonds were 3 billion. This situation leads us to question the strategy of the Agence France Trésor which has the mission to manage the State issuances on the financial markets to get the resources it needs to fulfill its action.

Two periods followed each other. During a little less than ten years, after the crisis of the euro, France has known a very low inflation and short term as long-term interest rates also near zero, when they were not negative. Despite its still high budget deficits, the debt charge has not followed the indebtedness increase and even, some years, has fallen. But the AFT strategy has consisted in reducing the positive effects of that environment through the issuance of bonds carrying largely higher rates than market ones and in collecting very substantial issuances premiums. Through the feeding of the State treasury, that reduced its needs of short-terms bonds. The State so was being a double loser: it would have to pay during the following years higher interest rates than these which were asked by the international monetary situation without any saving on the cost of its treasury because the short term rates were near zero and sometimes negative at that time.

For a year, France is in the inverse situation but the chosen financing mode is also quite unfavorable because the AFT this time issues bonds carrying rates inferior to market ones and has to issue more because subscribers of course don’t pay them at their face value. The short-term needs are so increasing. But to the difference of the previous period, these financings, with the rates increase decided by the European Central Bank, have become very costly. At last, France is still issuing indexed bonds, some based on French prices and other, which is much more worrying, on the euro zone prices, which are higher since the inflation return. Another major risk for the public finances is taken, which could not be ignored by the rating agencies.

France rating downgrading so risks to engage a vicious circle through the increase of the public debt cost, which will make a threat weighting on the country solvability whose nature could generate new downgrading by the agencies. Chosen techniques to collect the necessary funds for the State financing contribute to that situation. They may have two justifications. The first one, it is to find subscribers more easily. This option was very disputable in the period carrying very low rates when subscribers were rushing at each issuance. It becomes dangerous in the current context because it shows anxiety, which is never a good method to inspire trust. The second justification would be to threaten French people in holding up the threat of a high charge in order to make unpopular measures accepted. The current experience shows well that this method is not the right one and that France loses on both issues, social situation is worsening and worry starts to emerge on financial markets.

To the opposite an issue which is never mentioned is the situation of the ECB. It has contributed through the rates increases to make heavier the debt charges but it happens that it is the main beneficiary because it detains, according to the figures published by the Bloomberg agency, 29.4% of the French public debt, i.e. a little less than the average of the euro zone (33.2%) and much less than the German one (43.6%). On the roughly 40 billion paid by France to its creditors, 12 billion would have been done to the ECB where the State is a shareholder through the Banque de France. The amounts will increase in the coming years with the rates rises and the consequences of the inflation on the indexed bonds. It wouldn’t be pointless, in order to keep transparency, to say if these huge amounts have been reintegrated in the public accounts and under which forms.

The deterioration of the social situation and the France insufficient economic and financial recovery have justified the decision of the Fitch agency. This decision has nothing of symbolic and it would be followed by same decisions from other agencies. As a consequence, the indebtedness cost will increase which will be added to the repercussions of the rates increases and of inflation along also with the chosen financing methods which will have to be reformed in order to re-establish trust. Facing such challenges, the State cannot remain indifferent and even less self-important.