Moody’s Downgrades France Rating Due to Deteriorating Finances, Political Turmoil

December 14, 2024 TruthUSA

Despite the downgrade, Moody’s changed France’s outlook to stable from negative.

Credit rating agency Moody’s has downgraded France’s rating, citing a weak financial outlook amid political turmoil gripping Europe’s second-biggest economy.

In a Dec. 14 announcement, Moody’s cut France’s long-term domestic- and foreign-currency issuer and senior unsecured ratings to Aa3 from Aa2, citing weakened public finances due to political fragmentation and limited prospects for fiscal consolidation.

France’s budget deficit has surged this year, driven by record borrowing needs and exacerbated by the collapse of the government following a Dec. 4 no-confidence vote, stalling fiscal reforms.

“The decision to downgrade France’s ratings to Aa3 reflects our view that the country’s public finances will be substantially weakened over the coming years. This is because political fragmentation is more likely to impede meaningful fiscal consolidation, departing from the baseline scenario underpinning our October 2024 rating action,” Moody’s statement reads.

The baseline scenario Moody’s announced in October affirmed France’s credit rating at Aa2 but revised the outlook from stable to negative, citing concerns over the government’s ability to implement measures to prevent sustained budget deficits and deteriorating debt affordability. The negative outlook indicated increased risks to France’s credit profile due to political and institutional challenges affecting budget management.

In the Dec. 14 statement, Moody’s highlighted the challenges France faces in addressing its growing fiscal deficits, with the agency forecasting a rise in the debt-to-GDP ratio from 113.3 percent in 2024 to 120 percent in 2027. Deficits as a percentage of revenue are expected to hit 6.3 percent of GDP in 2025, before gradually decreasing to 5.2 percent of GDP in 2027.

Despite the downgrade, Moody’s changed France’s outlook to stable from negative, citing the country’s strong public institutions as well as its large, wealthy, and diversified economy, which is the 7th largest globally.

The downgrade announcement comes as French President Emmanuel Macron appointed veteran centrist Francois Bayrou as his fourth prime minister this year on Friday, following a political crisis that toppled his predecessor, Michel Barnier.

The Barnier-led government fell earlier this month after opposition lawmakers blocked his proposed 2025 budget, rejecting a $63 billion austerity plan aimed at cutting the fiscal deficit from 6.1 percent of GDP this year to 5 percent next year. The European Union advises member states not to let their fiscal deficits rise above 3 percent of GDP.

The crisis forced the outgoing government to propose emergency measures to extend 2024 spending limits and tax thresholds into 2025 until a new budget can be passed. Bayrou, a long-time advocate for fiscal responsibility, said upon taking office that the challenge of addressing the deficit was monumental.

“Looking ahead, there is now very low probability that the next government will sustainably reduce the size of fiscal deficits beyond next year,” Moody’s said in Saturday’s statement.

Outgoing finance minister Antoine Armand acknowledged Moody’s downgrade decision, emphasizing that Bayrou’s nomination reflects the government’s commitment to deficit reduction.

“Moody’s has announced the change in France’s rating to Aa3, highlighting recent parliamentary developments and the current uncertainty that results from them regarding the improvement of our public finances,” Armand said in a post on social media. “The appointment of Prime Minister François Bayrou and the reaffirmed desire to reduce the deficit provide an explicit response.”

The decision by Moody’s to downgrade France follows similar moves by rating agencies Fitch and S&P Global earlier this year. In May, S&P Global downgraded France on deterioration of its budgetary position, while giving the country a stable outlook. Citing similar factors, Fitch downgraded France in April and in October revised its outlook to negative.

“High political fragmentation and a minority government complicate France’s ability to deliver on sustainable fiscal consolidation policies,” Fitch said in the Oct. 11 announcement.

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