Moody's Ratings cut France's credit grade, heaps pressure on new govt

By Zoe Schneeweiss, William Horobin and Phil Serafino 

Moody’s Ratings cut France’s credit grade, heaping pressure on the new government to bring a ballooning deficit under control after far-right leader Marine Le Pen toppled the previous prime minister over a budget dispute. 

In an unscheduled change, Moody’s lowered its assessment of the euro area’s second-biggest economy to Aa3 from Aa2, three levels below the maximum rating. France has already been cut to equivalent levels by Fitch and S&P.

 

The decision “reflects our view that the country’s public finances will be substantially weakened over the coming years,” Moody’s said in a statement. “There is now very low probability that the next government will sustainably reduce the size of fiscal deficits beyond next year.” 

The rebuke came just hours after President Emmanuel Macron appointed Francois Bayrou as the country’s fourth premier in a year. Bayrou’s predecessor, Michel Barnier, was ousted in a confidence vote Dec. 4 after Le Pen’s National Rally lined up alongside left-wing parties to protest his plans for narrowing France’s budget deficit. 

 

 

Outgoing Finance Minister Antoine Armand said the downgrade reflects the recent parliamentary developments and uncertainty around the budget.

 

“The nomination of Francois Bayrou as prime minister and the reaffirmed will to reduce the deficit will provide an explicit response,” Armand said in a social media post.  

 

To avoid a no-confidence vote from the left, Bayrou will have to pledge not to use the same constitutional maneuver that Barnier employed to push the budget through without a vote in the National Assembly, Marine Tondelier, the head of the Green Party, said Saturday in an interview on France Inter radio.

 

The government’s collapse and the scrapping of France’s 2025 budget add to months of political upheaval that has already hammered business confidence, with the country’s economic outlook steadily deteriorating.

 

Barnier’s budget foresaw significant belt tightening by historical standards to bring the deficit to 5 per cent of economic output from 6.1 per cent this year. 

 

France has long been out of compliance with European Union rules that require member states’ debt to be below 60 per cent of GDP and a deficit under 3 per cent.  

 

Bayrou will likely have to pare back those ambitions in order to get support from some of the lawmakers who toppled Barnier, but economists say the final outcome may even be no improvement.

 

Plans to repair public finances were already derailed this year by poor tax revenues as consumer spending and corporate profits disappointed. The task became more complicated after Macron called a snap parliamentary election in June in an attempt to rebound from defeat in the European elections. 

 

Instead, his centrist coalition lost further ground, and the National Assembly was divided into three blocs, none with a majority – Le Pen’s far-right group, the centrists and the NFP on the left. The political turmoil drove the yield spread between French government bonds and their German counterparts to the widest since 2012, though it has since narrowed somewhat, to about 78 basis points.

 

The Moody’s downgrade could cause the spread to widen again toward 90 basis points, said Vincent Juvyns, global market strategist at JPMorgan Asset Management, adding that he wouldn’t expect markets to be “over-concerned” by such a move.

 

“Sentiment is rather good on the European sovereign debt market,” Juvyns said in a phone interview. “There are a lot of investors looking for extra yield who will be interested in buying French debt if there is an attractive discount.”

 

The first task for Bayrou, a veteran centrist who’s supported Macron throughout his presidency, is to appoint a slate of government ministers. He’s spending the weekend consulting other political leaders, including Yael Braun-Pivet, the president of the National Assembly. He met Friday, his first day on the job, with Bruno Retailleau, the outgoing interior minister known as a fierce opponent of immigration, to the annoyance of some on the left. 

Tondelier, whose Green Party is part of the leftist NFP coalition, said the meeting with Retailleau was a bad sign for Bayrou’s longevity in the job.

 

“We’ll have to wait and see what he does in the next few days,” she said in the radio interview. “Today, I can’t see how he can convince us not to censure him, especially if he doesn’t call us. And if his first political gesture is to receive Bruno Retailleau, it’s not looking good.”