Moody’s hands France surprise downgrade over deteriorating finances

PARIS: Credit ratings agency Moody’s unexpectedly downgraded France’s rating on Friday, adding pressure on the country’s new prime minister to corral divided lawmakers into backing his efforts to rein in the strained public finances.

The downgrade, which came outside of Moody’s regular review schedule for France, brings its rating to ‘Aa3’ from ‘Aa2’ with a stable outlook for future moves and puts it in line with those from rival agencies Standard & Poor’s and Fitch.

It comes hours after President Emmanuel Macron named on Friday veteran centrist politician and early ally Francois Bayrou as his fourth prime minister this year.

His predecessor Michel Barnier failed to pass a 2025 budget and was toppled earlier this month by left-wing and far-right lawmakers opposed to his 60 billion euro belt-tightening push that he had hoped would rein in France’s spiralling fiscal deficit.

The political crisis forced the outgoing government to propose emergency legislation this week to temporarily roll over 2024 spending limits and tax thresholds into next year until a more permanent 2025 budget can be passed.

“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 a statement.

“As a result, we forecast that France’s public finances will be materially weaker over the next three years compared to our October 2024 baseline scenario,” it added.

Barnier had intended to cut the budget deficit next year to 5.0 per cent of economic output from 6.1 per cent this year with a 60 billion euro package of spending cuts and tax hikes.

But left-wing and far-right lawmakers were opposed to much of the belt-tightening drive and voted a no confidence measure against Barnier’s government, bringing it down.

Bayrou, who has long warned about France’s weak public finances, said on Friday shortly after taking office that he faced a “Himalaya” of a challenge reining in the deficit.

Outgoing Finance Minister Antoine Armand said he took note of Moody’s decision, adding there was a will to reduce the deficit as indicated by the nomination of Bayrou. The political crisis put French stocks and debt under pressure, pushing the risk premium on French government bonds at one point to their highest level over 12 years.