Standard & Poor's (S&P) decision to downgrade France's sovereign debt rating will have a greater political impact in the short term than a shock to financial markets.
A few days before the European Parliament elections on June 9, S&P downgraded France's long-term sovereign debt rating from "AA" to "AA-" on Friday, citing a higher-than-expected deficit that will increase the debt of the Eurozone's second-largest economy.
In a report on Wednesday, Citi analysts said the downgrade could widen the spread between French and German benchmark bonds by 3-5 basis points (bps).
This will be a relatively small impact, pushing the spread to around 50 basis points, roughly the same level as two months ago after the government raised the budget deficit forecast.
The downgrade adds pressure on President Macron's government to detail billions of euros in budget savings measures to keep its deficit reduction plan on track.
After raising its deficit forecast in April, the government now expects to reduce the public sector budget deficit from 5.1% of economic output this year to 4.1% next year, with a goal of reducing the fiscal gap to the EU-mandated 3% by 2027.
S&P said it expects France to miss the 2027 target, forecasting a deficit of 3.5% of GDP by then.
The International Monetary Fund and the national public finance watchdog have also questioned whether the target is achievable, urging the government to detail the pledged budget-saving measures.
The government said it would need to save 2 billion euros ($2.2 billion) not included in the 2024 budget law to meet this year's deficit target.
The government said some savings will come from a freeze on ministerial spending, cuts in development aid, reducing room for unexpected expenditures, and additional austerity measures for local governments.
But the government faces more specific pressure, especially to detail another 2 billion euros in savings needed next year.
