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Moody’s downgraded France’s credit standing on Saturday, saying that it expects the country’s incoming government to struggle to tackle its deficit.
In an unscheduled announcement early on Saturday morning, the rating agency lowered France’s long-term issuer rating from Aa2 to Aa3, blaming political instability that can make it difficult to tackle the national deficit. France’s funds might be “substantially weakened” in the approaching years, it said.
The move underlines the economic challenges facing recent prime minister François Bayrou.
Former prime minister Michel Barnier’s minority government fell in a no-confidence vote earlier this month after he was unable to garner support in France’s fractured parliament for his tax and spending plans.
“There may be now very low probability that the following government will sustainably reduce the scale of fiscal deficits beyond next yr. In consequence, we forecast that France’s public funds might be materially weaker over the following three years in comparison with our October 2024 baseline scenario,” the agency said.
The move by Moody’s is prone to put further pressure on France’s government debt when trading reopens on Monday. Investors’ unease concerning the country’s fiscal situation has already pushed its 10-year borrowing costs above 3 per cent this yr, and the extra margin that it pays over benchmark German debt is at its highest for the reason that Eurozone debt crisis.
S&P Global Rankings downgraded France’s credit standing in May from AA to AA-, similar to Moody’s Aa3 rating. Fitch kept its rating at AA- in October but lowered its outlook from stable to negative, a precursor to a downgrade if improvements usually are not made.
After President Emmanuel Macron nominated long-term ally Bayrou as prime minister on Friday, Bayrou said in his acceptance speech that he would make tackling the debt burden a priority.
“Debt is an ethical problem since putting it on the shoulders of our kids is unacceptable,” he said.
France had a deficit of 5.5 per cent in 2023, the second highest within the Eurozone after Italy, in accordance with EU figures. Moody’s expects this to achieve 6.3 per cent in 2025 before step by step decreasing to around 5.2 per cent in 2027.
The country’s debt-to-GDP ratio would increase from 113.3 per cent in 2024 to 120 per cent in 2027, the agency predicted.
France has already been reprimanded by the European Commission for breaching an annual borrowing limit of three per cent of GDP, as a part of efforts by Brussels to bring debt levels under control across the EU.
Bayrou faces the identical difficult parliamentary arithmetic as Barnier did, with the country’s parliament fractured into three blocs after this summer’s legislative elections.
Moody’s said that France has significant credit strengths and a diversified economy. But there may be a risk of a “durable increase” in the associated fee of financing the country’s debt that would create a “negative feedback loop between higher deficits, a better debt load and better financing costs”.
Bayrou’s first task might be to ask parliament to pass an emergency stop-gap budget law as a way to avoid a shutdown of presidency services until a brand new budget will be passed next yr. The centrist politician is within the means of appointing his government.
Outgoing caretaker finance minister Antoine Armand said he “takes note” of the Moody’s downgrade. “The appointment of Prime Minister François Bayrou and the reaffirmed desire to cut back the deficit provide an explicit response to this,” he said.
Additional reporting by Ian Smith in London
