Moody’s Upgrades France’s Rating but Lowers Future Prospects

Moody’s has downgraded France’s outlook from “stable” to “negative,” while maintaining its “Aa2” rating, citing concerns about the government’s ability to address increasing budget deficits. Economic Minister Antoine Armand acknowledged the need for significant reforms. The agency’s analysts noted that France’s debt levels are the highest among its peers, with a projected deficit of 6.1% of GDP this year. Investors are now wary of French debt amid rising costs compared to other European nations.

Moody’s has opted for a cautious stance regarding France’s public finances, choosing not to implement any severe sanctions. The agency has maintained France’s rating at “Aa2”, yet has shifted its outlook from “stable” to “negative”. This modification reflects the increasing concern that the French government may struggle to put necessary measures in place to avoid larger-than-expected budget deficits, according to Moody’s statement.

Antoine Armand, the Minister of the Economy, has acknowledged this outlook and expressed confidence in his ability to implement significant reforms. He emphasized, “Yes, France has real economic strengths. It is also capable of carrying out far-reaching reforms. Some have already produced convincing results in terms of employment or economic attractiveness for our country. It is with this same energy that the Government will act to restore our public finances.”

Following June’s political reshuffle, Moody’s had previously articulated concerns regarding the political stability in France. Analysts noted, “Given the unstable political landscape, it is quite possible that the targets (for restoring the accounts) will be abandoned, despite likely pressure from the European Commission.” They also highlighted that “France’s debt burden is higher than that of its similarly rated peers, and the pace of deficit reduction will lag behind most other European countries.”

This year’s projections indicate a deficit of 6.1% of Gross Domestic Product (GDP) and a debt load of 113%. The French Treasury aims to cut the deficit to 2.8% by 2029 while anticipating that debt will still hover around 115.8%. Éric Dor, director of economic studies at Ieseg, remarked that “France’s deficit, debt, and real growth performance forecasted for 2023, 2024, and 2025, are inferior to those of most other European nations with similar or lesser ratings, with Italy being a notable exception.”

Market Concerns

Given these circumstances, many experts had feared a potential downgrade of the country’s rating. Moody’s has provided a more lenient rating than its main rivals, Fitch and Standard & Poor’s, scoring 18 compared to their 17. This has led to renewed skepticism among investors regarding French debt. The aftermath of political turmoil has resulted in France’s ten-year debt becoming pricier than that of Portugal or Spain, while the spread between French and German bonds has widened. The anticipated debt burden is projected to reach around €100 billion by 2029.

Politically, Moody’s decision may assist the current administration, which is navigating a tumultuous budget discussion in parliament. The downgrade in outlook may help Michel Barnier’s government argue for the necessity of restoring fiscal discipline.

Moreover, not downgrading the rating helps prevent potential market volatility. Investors typically do not provide advance warning before a debt crisis or credit crunch occurs; these situations often arise from sudden negative news that heightens current anxieties. With a debt issuance plan of €300 billion through 2025, France must avoid such a crisis at all costs.

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