Fitch Ratings has published a Special Report on French Public Finances, examining the implications for the government deficit and debt, and France’s sovereign credit profile, of weaker economic growth and the potential contingent liabilities arising from the intensification of the Eurozone crisis.
According to Fitch, the recent adoption of new fiscal measures by the French government has enhanced the credibility of the government’s consolidation program. However, additional measures are still likely to be necessary if the 3% of GDP deficit target is to be achieved by 2013, with Fitch projecting the deficit in 2013 to be around 4% of GDP. In Fitch’s baseline scenario, the debt to GDP ratio will peak at 91.7% in 2014, in line with projected peak debt levels for France’s main ‘AAA’ peers and consistent with France retaining its ‘AAA’ status.
France’s ‘AAA’ status continues to be underpinned by a high-value added and diverse economy, broad and stable tax base and its commitment to deficit reduction and stabilising, and eventually reducing, public debt. Its structural budget deficit is smaller than that of the UK (‘AAA’) and US (‘AAA’) and general government debt is expected to peak at around 90% of GDP, which is similar to the level forecast for the UK and less than the projection of 105% for the US.
Similar to the situation of other major ‘AAA’ sovereigns, the increase in government debt has largely exhausted the fiscal space to absorb further adverse shocks without undermining their ‘AAA’ status. The principal concern with respect to France is that the intensification of the eurozone crisis will generate contingent liabilities that will be crystallised onto the sovereign balance sheet.
Today’s report suggests that were France’s EUR158.5bn guarantee commitment to the EFSF (‘AAA’) to be fully utilised – not Fitch’s current base-case scenario – gross government debt would surpass 95% of GDP, placing it at the higher end of the range that Fitch judges would be consistent with France retaining its ‘AAA’ status. This would leave the sovereign balance sheet with little room to absorb further shocks, such as having to fund capital injections into domestic banks, unless there were significant off-setting measures that would quickly reduce public debt to levels consistent with its ‘AAA’ rating. Fitch does not currently expect the French banks to require or to receive capital injections from the state at this juncture.
Under a stress scenario whereby a further intensification of the eurozone crisis resulted in a much sharper economic downturn in France and across the region, and a material increase in the risk of contingent liabilities being crystallised, especially with respect to financial support for the banking sector, France’s ‘AAA’ rating would be at risk.
Source : Fitch Press Release
