Moody's kept France at Aa3 with a negative outlook, avoiding a downgrade as the country faces protests and surging bond yields. The agency ties the negative outlook to the increased risk from political fragmentation, and the government now has to pass a 2027 budget that Moody's assumes will cut the deficit.
Moody's kept France's rating at Aa3 and maintained its negative outlook on Friday, as the country contended with a week of civil unrest and rising political risk.
The Financial Times reported that Moody's did not downgrade because it assumed a deficit-reducing budget for 2027 will be adopted, while financing costs and social tensions abate somewhat in the next few months. Still, the agency said conditions were worse than it had expected only months ago.
Moody's ties the outlook to political fragmentation
Moody's said the negative outlook reflects the increased risk that the fragmentation of France's political landscape will continue to impair the functioning of the country's legislative institutions. It noted it could return the outlook to stable if France's institutions can narrow the deficit.
According to the FT, Moody's wrote that bond yields have risen more rapidly than it expected and that widespread social protests could constrain fiscal consolidation efforts.
Yields and debt keep climbing
France's 10-year bond yield surpassed 5% this week for the first time since 2002, and the spread against German bunds is at a 15-year peak. The deficit sits at roughly 5.5% of GDP, above the 3% limit for European Union member nations.
Meanwhile, France's finance ministry warned a month ago that the debt-to-GDP ratio is expected to hit 121.7% in 2027. The country also faces more than $1 trillion of debt maturing by 2030.
A 2027 budget fight awaits
President Emmanuel Macron's minority government, led by Prime Minister Sébastien Lecornu, faces a battle in parliament to pass a 2027 budget that includes €43bn in cuts and tax rises. A united opposition that has dismissed the plan as too harsh could topple the bill, the FT said.
Moody's projects a deficit of only 5.2% of GDP next year, and it said implementing the full planned spending cuts will be politically challenging.
Sources: CNBC, Financial Times
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