Macron Faces Fresh Test as Outlook for French Finances Dims

To the list of challenges facing President Emmanuel Macron after raucous nationwide demonstrations over his pension measures, add a new one: a cascade of warnings over France’s finances.

On Friday, S&P Global cautioned that it still had a negative outlook on France’s creditworthiness. It was a step short of a downgrade, which some had expected, but comes after two other ratings agencies have lowered their view of the country in the past month.

S&P Global maintained its investment-grade credit rating for France, a decision that Mr. Macron’s government had eagerly awaited. But in restating a negative outlook first published in January, the ratings agency cited concern about France’s ability to rein in its public finances amid already elevated general government debt.

And it added to concern among analysts about Mr. Macron’s ability, in a tense social and political climate, to move forward with his efforts to lift the country’s competitiveness and growth.

France’s finance minister, Bruno Le Maire, said in an interview late Friday published in the Journal du Dimanche that he viewed the announcement as a “positive signal,” adding: “Our public finance strategy is clear. It is ambitious. And it is believable.”

At the end of April, Fitch Ratings cut France’s sovereign credit rating by one notch, to AA–, after a downgrade in December. Scope Ratings, a European agency, put a negative outlook on its assessment of France last month.

France’s economy, the eurozone’s second largest, is forecast to remain subdued until at least next year, but more worrisome to ratings agencies is the nation’s financial situation. France spent vast sums to shield households and businesses from an inflation crisis and painful pandemic lockdowns.

Its debt has surged to 111 percent of economic output, casting France into a club with Greece, Italy, Portugal and Spain — the major eurozone economies holding the highest debt ratios. In Germany, which has Europe’s largest economy and is its stickler for budget discipline, the debt burden is 66 percent of economic output.

S&P Global said it could lower France’s ratings in the next 18 months if the debt did not decline, a risk that would be amplified if there was a prolonged economic slowdown or if France did not adequately curb government spending.

The potential for a downgrade had worried the government and was sensitive enough that Mr. Le Maire and France’s prime minister, Élisabeth Borne, met recently with representatives of S&P to press their case. S&P had put France on notice in January that a downgrade was possible.

“There were detailed explanations from Bruno Le Maire to Standard & Poor’s on everything we’re doing to control our public finances,” Ms. Borne told a French radio station last week. The finance minister “explained France’s reforms and its objective of cutting the country’s budget deficit,” she said.

Mr. Le Maire has said stoking economic growth would be the best way to pay down the debt. But with the economy expected to grow just 0.8 percent this year, the government has pored through the budget to find offsetting cuts and limit growth in spending.

Ratings agencies have expressed concern that the potential political deadlock and social unrest pose risks to Mr. Macron’s agenda. Nationwide demonstrations — many of them violent — broke out after he invoked executive power to bypass Parliament to ram through a measure that raised France’s legal retirement age to 64 from 62, a change opposed by nearly three-quarters of voters in opinion polls.

Mr. Macron, who lost a parliamentary majority when he was re-elected in April, said the maneuver was necessary to keep the pension system from falling into a deficit and to generate 17 billion euros ($18.2 billion) in savings in the coming years. Fitch and S&P Global gave it an approving nod as a moderately positive development.

But S&P Global cautioned that “political fragmentation” under Mr. Macron’s watch had raised questions over his government’s ability to carry out policies to stoke more growth and rein in the budget deficit.

His critics saw Mr. Macron’s use of executive authority as an abuse of power and have vowed to keep up the fight over other measures that Mr. Macron plans to put forward. Opponents have continued to harass the president and his cabinet members by banging pots and pans on their official trips.

Mr. Macron has sought to show that he was quickly moving France back to business and trying to burnish its image after the turmoil. He hosted 200 global chief executives, including Elon Musk, Robert A. Iger of Disney and Lakshmi Mittal, the steel magnate, at Versailles last month for a business conference that drew pledges for €13 billion of new investment in France.

The moves are part of a plan by Mr. Macron, a former investment banker, to attract new investment and champion a push toward green industries to revitalize the French economy — partly by spending lavishly on subsidies to attract foreign companies and keep French ones from moving jobs abroad.

Since taking office in 2017, Mr. Macron has cut business taxes and made it easier to hire and fire workers. New rules would push unemployed people to look for jobs, a controversial measure that would create over €4 billion in savings and theoretically help address a labor shortage. And for a fourth straight year in 2022, France was the European country that attracted the greatest number of foreign investments, according to a survey by EY, formerly Ernst & Young.

S&P Global said it expected labor market performance and the French economy overall to “continue to benefit from reforms implemented over the past decade.”

But such developments haven’t allayed concerns about France’s ability to pay down the enormous expenses the government has racked up.

France’s public debt soared after Mr. Macron spent nearly half a trillion euros shoring up the economy during the Covid pandemic. It is now nearly €3 trillion, and the cost of servicing the debt, which was low during the pandemic, has surged recently with inflation: About a tenth of all bonds issued by the French government are indexed to inflation, swelling the state’s payment bill. Adding to the pressure is the run-up in interest rates by the European Central Bank.

All told, France’s debt burden, or the amount of interest to be repaid, jumped to €42 billion in 2022 from $31 billion two years ago. The government expects that figure to rise to €60 billion by 2027 — as much as the national education budget.

“A lot of money has been spent to help the economy, people and firms,” said Charlotte de Montpellier, France analyst at ING Bank. “It worked when the economic situation was good, but public finances have been severely impacted.”