France pledges 'structural reforms' after Fitch downgrade

France will pursue structural reforms as it strives to overhaul its economy, Finance Minister Bruno Le Maire told the French AFP news agency, after credit agency Fitch downgraded the country's debt worthiness.

Late on Friday, Fitch announced it graded France's long-term foreign currency issuer default rating (IDR) at "AA-", down from from "AA."

Newspapers mostly focused on the agency's mention of the protests against the pension reform, while the finance minister argued that Fitch's decision was not a fair reflection of the facts. 

What did Le Maire say?

Speaking to AFP, Le Maire vowed to continue to "pass structural reforms for the country."

"I believe that the facts invalidate Fitch's assessment," the minister said, while in Stockholm for an EU finance ministers' meeting. "We are able to implement structural reforms and we will continue to implement structural reforms for the country."

"Do not doubt our total determination to restore the nation's public finances… to accelerate the country's debt reduction, to reduce deficits and to speed up the reduction of public spending," he said. 

As Le Maire appeared to try to argue that his goverment pursuing its pension reforms amid major protests demonstrated this resolve, Fitch argued that the "social and political pressures illustrated by the protests against the pension reform will complicate fiscal consolidation" in France in future.

President Emmanuel Macron's government pushed the reforms through without a vote in the lower house of parliament, prompting months of major strikes and protests. This was necessary as Macron's bloc lost its majority in the National Assembly during the legislative elections following Macron's re-election as president. Macron signed it into law this month.

He had pledged to carry out a similar reform in his first term, but delayed for years amid resistance and ultimately called off the plan when the COVID pandemic hit. 

Even after the increase from 62 to 64, France's retirement age will be among the lowest in the developed world. Most of western Europe is either at 65 or higher, and many countries like Germany plan to increase it further still in the coming years. 

What does the downgrade mean? 

The credit downgrade means Fitch perceives France as a more risky venture for investors than previously.

It could lead to France having to pay higher interest rates on money it borrows, potentially making fixing its debt burden even more difficult going forward.

The AA rating France previously had was already poor by the standards of a G7 economy.

Now being placed at AA- (the lowest bracket of the AA ratings which Fitch still describes as "very high credit quality") means it's seen as roughly as reliable as the UK — fresh from the fallout from Brexit and still recovering from Liz Truss' economically disastrous and fleeting tenure as prime minister — and only more creditworthy than the G7's famously debt-laden members Japan and Italy. 

What else did Fitch say?

In its statement announcing the downgrade, Fitch cited weak fiscal metrics, expenditure rigidities, high government debt and higher interest expenses as high drivers for the rating.

Among the medium drivers, the agency noted the social and political pressures which it said were reflected in the protests against Macron's pension reform bill. It said they would "complicate fiscal consolidation."

The agency also warned that bypassing the parliamentary vote to push through the bill could "likely further strengthen radical and anti-establishment forces."

"Political deadlock and [sometimes violent] social movements pose a risk to Macron's reform agenda and could create pressures for a more expansionary fiscal policy or a reversal of previous reforms," the agency predicted.

rmt/msh (AFP, Reuters)