France credit rating outlook cut to negative by Moody's on deficit woes

By William Horobin

 

France’s credit rating was put on a negative outlook by Moody’s Ratings in the third warning in the space of two weeks over the deterioration of public finances and the political challenges in containing containing swollen budget deficits. 

Moody’s put the negative outlook on its Aa2 assessment, a rating France shares with South Korea and United Arab Emirates, two levels below the maximum rating. 

 

The decision “reflects the increasing risk that France’s government will be unlikely to implement measures that would prevent sustained wider-than-expected budget deficits and a deterioration in debt affordability,” Moody’s said in a statement Friday. “The fiscal deterioration that we have already seen is beyond our expectations and stands in contrast with governments in similarly rated countries that are tending to consolidate their public finances in the current environment.”

 

 

The rebuke comes two weeks after Fitch slapped a negative outlook on its assessment of France’s creditworthiness and a week after Scope Ratings downgraded. The next scheduled assessment will come Nov. 29 from S&P, which already cut France earlier this year.

 

France’s finances are under intense scrutiny as President Emmanuel Macron’s plans to pare back the budget deficit have repeatedly slipped off course. Adding further uncertainty, his decision to call snap elections in June has clouded the outlook for policy in France, leaving it with a minority government that could easily be toppled by parliament. 

 

“The risks to France’s credit profile are heightened by a political and institutional environment that is not conducive to coalescing on policy measures that will deliver sustained improvements in the budget balance,” Moody’s said. “As a result, budget management is weaker than we had previously assessed.” 

 

 

Investors reacted to the recent political turmoil in Francey by selling French assets, driving up the premium the country pays on its 10-year debt over Germany to more than 80 basis points, from below 50 earlier this year. That premium has ebbed to around 73 and 75 basis points basis points as the prospect of faster interest-rate cuts helps debt-laden countries like France and Italy outperform.

 

In an effort to steady the situation, Prime Minister Michel Barnier’s government presented a 2025 budget plan last week with €60 billion ($64.7 billion) of spending cuts and tax increases to bring the deficit to 5% of economic output from 6.1% this year. That’s a first step toward getting the gap within the EU’s 3% limit by 2029 — something the previous government had pledged to do by 2027. 

 

Moody’s said that deficit is likely to come in at over 6% of GDP this year, adding that the government’s plan to reduce it to 5% in 2025 is “unlikely to be reached due to the scale of fiscal consolidation that it would require.”

 

The ratings company said it could downgrade France if the country were to announce a “medium-term fiscal strategy that fails to reverse adverse fiscal trends or lacks credibility about its effective implementation.”

 

It also warned against undoing reforms Macron has implemented since he came to power in 2017.

 

The government’s latest plans have also come under fire from France’s high council for public finances, the HCFP. According to the institution, the entire 2025 budget is fragile as the growth assumptions are too optimistic given the degree of belt tightening the government plans.

 

France has a “public finance situation that has to be tackled,” Finance Minister Antoine Armand said in response to Friday’s rating action. “We didn’t wait for the negative outlook to take the necessary measures.”

 

The hung parliament in France is another risk for finances. Without a majority to back the budget, Barnier will likely have to use article 49.3 of the constitution to bypass a vote in the National Assembly — a move that increases the likelihood of no-confidence motions. 

 

The leftist New Popular Front’s attempt topple the government earlier this month failed to get enough support, but that would change if the far-right bloc led by Marine Le Pen backed a future censure motion.

 

Moody’s said  that the “current political situation for France is unprecedented, and it raises risks about the ability of the institutions to deliver sustained deficit reductions.”