07:27 AM EDT, 10/11/2024 (MT Newswires) -- The French government late Thursday revealed the details of the budget that will now be scrutinized in parliament with the objective for it to be passed by the end of the year, noted MUFG.

As expected, the budget lays out plans for fiscal consolidation totaling 60.6 billion euros with just over 40 billion euros coming from spending cuts and a little less than 20 billion euros from tax increases. A temporary levy on profitable companies and a tax on maritime transport companies are some measures to lift tax revenues as are higher tax rates on 65,000 wealthier households.

A delay to the indexation of pensions from January to July will also add to savings. This pension measure has been criticized by Marine Le Pen and her far-right RN party but there has been little indication that RN will be willing at this stage to trigger a no-confidence motion in the government which would easily pass with the support of the Left Alliance, wrote the bank in a note to clients.

Without these measures, the budget deficit was set to rise from 6.1% this year to 7.0% next year, stated MUFG. Now the deficit is expected to fall to 5.0%.

This consolidation will be done against a gross domestic product growth projection of 1.1% next year. That's the element that investors may well decide lacks credibility, especially if the bank sees incoming economic data weakening going forward.

The sovereign ratings agencies may also deem that the details lack credibility, pointed out MUFG. Later Friday, Fitch will provide an update on its review which currently stands at AA- following a downgrade from AA in April 2023. There is certainly a high chance that Fitch could put France on negative watch.

Moodys will then provide its update in two weeks and finally S&P on Nov. 29. Moodys ratings is one notch above Fitch's and S&P's and so there is a risk it could downgrade France on Oct. 25.

Issuance of OATs will increase from 285 billion euros this year to a projected 300 billion next year to finance this budget, which was in line with expectations and as such should for now contain risks of a widening of the OAT/Bund spread, according to MUFG.

The European Central Bank cutting rates at a faster pace due to a faster drop in inflation will certainly help contain those risks as well. The minutes from the last ECB meeting were released on Thursday and there was nothing in the details to reduce expectations of a rate cut next week.

The minutes cited the view that the risk of undershooting the inflation target had become "non-negligible" which is significant and underlines the shifting views toward potential downside inflation risks. The OIS curve the bank believes is more accurately priced for the ECB than it is for the United States Federal Reserve at the moment.

For the ECB, the neutral rate is hit by around mid-year but for the Fed, the OIS curve implies monetary restriction will persist through to year-end next year. MUFG believes this relative pricing will limit downside risks for EUR/USD from here.