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France's deficit widens further

The second-largest Eurozone country faces fiscal challenges amid economic sluggishness and public debt

By EC Invest

France's budget deficit slipped again in 2023. While the target of 4.9% of GDP already seemed very lax, France did even worse, closing last year with a deficit of 5.5%.

To justify this, Paris points to the sharp deterioration in tax revenues in the 4th quarter due to sluggish economic activity. But this has only made a situation that was already worrisome at the outset somewhat worse, resulting from the rather optimistic premises on which the initial objective was based.

If the objective of a return to a 3% deficit in 2027 is maintained, this deficit and a public debt that now exceeds 110% of GDP cements France's position among the worst in the Euro area regarding fiscal consolidation.

Risk of debt rating downgrade

Those issues also arise when the country is already on borrowed time, and several rating agencies may well downgrade France's debt rating. This could have implications for demand for France's debt issuances and, ultimately, the interest rate at which the country finances itself.

This surge in public debt also underscores the difficult choice that many eurozone countries will face. If they manage to keep their savings afloat, it is, at least in part, because governments are spending lavishly. As they are forced to reduce their spending, savings will be affected, as will households, which have been much less impacted by inflation than expected due to the heavy intervention of governments to subsidize energy or fuel prices, among many others.

Rates are relatively stable – for now

This latest slippage also underscores that some countries still need to take their responsibility seriously a decade after the Eurozone sovereign debt crisis. As a result, only the ECB's strong presence in the debt markets allows us to maintain calm.

For the moment, the markets ignore this deterioration, and France continues to finance itself at around 2.8% for the 10-year rate, a rate that has remained relatively stable over the last two months. But in 2023, more than half of France's debt was held by foreigners. It is not impossible that, at some point, the latter will start to have doubts, causing the yields demanded to finance the 2nd largest economy in the Eurozone to soar.

ECI FRANCE DEFICIT GRAPHIC 920x320 French public accounts have mainly remained stable at a shallow level despite the sharp deterioration over the past two months.

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