French Vote Outcomes Will Probably Pressure Rating, Scope Says

(Bloomberg) -- Both of France’s most likely outcomes in Sunday’s election runoff would hurt efforts to fix its public finances and threaten a wider European impact, according to Scope Ratings.

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The credit-assessment company, in a report released on Wednesday, said the country’s existing plan to bring its budget deficit below the European Union’s 3% threshold by 2027 is already “out of date” and that neither scenario for the vote seems set to improve that outlook.

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“The emerging alternatives of either a hung parliament or an outright victory for the far-right National Rally would in either case diminish the prospect of growth-enhancing and cost-saving reforms, adding pressure to France’s sovereign credit rating,” Scope Ratings analysts Thomas Gillet and Brian Marly wrote.

President Emmanuel Macron’s decision last month to call the snap vote prompted investors to demand the highest premium on French bonds since 2012. While that has improved, the lingering worry in financial markets is that any result could lead to more public spending and further bloat a debt pile that already exceeds 110% of gross domestic product.

“France’s stretched public finances and high political polarization already limit the sovereign’s room for policy maneuver, which are precisely the risks either parliamentary outcome will likely reinforce,” the analysts said.

They observed that wider dangers posed by such outcomes include the effect of braking EU-level initiatives as well as hurting the bloc’s newly revamped deficit regime.

“Political and policy developments in France are likely to negatively affect the scope and pace of the EU’s reform agenda, including advancements on deepening the single market, the capital markets union, and the size and priorities of the next EU budget,” Gillet and Marly wrote. “The credibility of the EU’s recently adopted fiscal framework could also be tested.”

Scope Ratings has a negative outlook on the euro zone’s second-biggest economy, which it scores at AA. That’s one level higher than rival S&P Global Ratings, which downgraded France at the end of May. The company’s next possible assessment date is scheduled for Oct. 18.

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