San Francisco Frontiers - France risks credit downgrade as new PM tackles budget

US ratings agency Fitch, one of the top global institutions gauging the financial solidity of sovereign borrowers, is to deliver its latest assessment of France's creditworthiness later on Friday after Wall Street closes.

It comes only days after Lecornu's predecessor Francois Bayrou lost a confidence vote in parliament over an attempt to get an austerity budget adopted, which he had hoped would cut the French deficit and tackle a growing debt mountain.

Fitch currently rates France's ability to repay its sovereign debt at "AA-", indicating "a very strong capacity for payment of financial commitments".

A downgrade to A would imply that France's debt repayment capacity may be "more vulnerable to adverse business or economic conditions".

An agency rating downgrade typically raises the risk premium that investors demand of a government to buy sovereign bonds -- although some financial experts suggested that the debt market already reflects the expected downgrade for France.

On Tuesday the return on French 10-year government bonds, known as the yield, rose to 3.47 percent, uncomfortably close to that of Italy, one of the eurozone's worst performers.

- 'Everyone is watching' -

Rising yields would translate into an increase in the cost of servicing France's debt which Bayrou warned was already at an "unbearable" level.

"Everyone is watching France's finances," said Charlotte de Montpellier, an economist at ING.

A downgrade would "make sense", said Eric Dor, at the IESEG business school, citing France's political situation which made it difficult to establish "a credible plan for budgetary consolidation".

Since President Emmanuel Macron's allies in parliament have no overall majority, they will have to make compromises that could easily undermine any drive to slash spending and raise taxes -- with Lecornu's job potentially on the line, just as Bayrou's was before him.

Dor said Fitch also needed to ensure consistency in its ratings, given that most EU governments are running smaller deficits than France and have less accumulated debt, yet suffer a lower debt rating.

France's budget deficit represented 5.8 percent of gross domestic product (GDP) last year, and its debt 113 percent of GDP.

This compares with eurozone ceilings of three percent for the deficit, and 60 percent for debt.

- 'Growth is holding up' -

Some economists nevertheless see a chance of Fitch holding off for now to give Lecornu a chance to present a government team capable of meeting the budgetary challenge.

Such a scenario would be "plausible", said Lucile Bembaron, an economist at Asteres.

There is at any rate no great urgency to act on the credit rating, added Hadrien Camatte, an economist at Natixis, given that the budget has not worsened dramatically this year and "economic growth is holding up".

National statistics bureau INSEE said Thursday that GDP was projected to grow by 0.8 percent this year, 0.1 points more than the previous government's estimate.

But even if Fitch stays put on Friday, rival ratings agency S&P Global is unlikely to do the same when it publishes its next update in November, said Anthony Morlet-Lavidalie, at the Rexecode economic institute.

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Y.Harris--SFF