'23 Deficit Matches 'Leak' Indications, Run Of Sovereign Rating Reviews Due In Coming Months

France’s ’23 deficit/GDP ratio printed at 5.5%. That was wider than the government’s 4.9% target and in line with pre-release reports/political commentary pointing to 5.4-5.6%.

• A reduction in the debt/GDP ratio also failed to meet the government’s target.
• The wider deficit was driven by softer-than-expected revenues.
• This cements upside risks to the government’s ’24 deficit/GDP target of 4.4%, making further spending cuts likely. Finance Minister Le Maire indicated as much post-release.
• The expected impact on long end issuance is seemingly limited (medium- and long-term OAT auctions have already been upsized), with Citi suggesting that the deficit overshoot will mostly be funded via bills.
• France could also lower the size of its OAT buybacks, as the country’s funding target is net of buybacks.
• France’s sovereign credit rating is scheduled to be reviewed by Fitch, Moody’s, S&P and Scope Ratings across April & May.
• S&P’s update (31 May) is likely to get the most interest as they currently have France at AA, with a negative outlook.
• Fitch has France one notch below at AA-; Outlook Stable.
• OATs had already widened vs. Bunds, DSLs and OLOs in recent days, on the back of the ‘leaks’ of the deficit/GDP ratio, limiting market reaction/widening today.
• The pre-release widening will reflect at least some risk of an S&P downgrade.
• Limited OAT issuance feedthrough and the recent OAT spread widening should limit the impact of a one-notch downgrade by S&P (assuming the outlook is changed to Stable), if it does materialise.
• Spread widening risks include S&P maintaining a negative outlook after a downgrade and/or Fitch moving their outlook to Negative, particularly given ECB balance sheet plans.

Source: MNI - Market News/Bloomberg