The rating agency expects “a deterioration in the sustainability of French debt” as well as “an increased risk of political instability”.
The assessment of the French economy on slippery ground. The dissolution of the National Assembly announced on Sunday by Emmanuel Macron “increases the risks” concerning France’s budgetary control, and therefore on its rating, noted Monday evening the rating agency Moody’s. Moody’s ranks France Aa2 with stable outlook, a notch above the other agencies Fitch and S&P, which have placed it at AA- since 2023 and the month of May respectively. The winning party of the early elections of June 30 and July 7 “will probably not have an absolute majority”notes Moody’s, since the majority would need “around forty additional seats”and at the National Rally “more than 200”.
The rating agency highlights the risks of an increase in motions of censure during the next legislature, and sees this as “an increased risk of political instability, especially since the National Assembly cannot be dissolved in its first year”. Such instability “creates credit risk”underlines Moody’s, while the outgoing government has already had to sharply revise its public deficit forecasts for 2024 and 2025, while maintaining its forecast of a return to 3% of GDP in 2027. “Given the instability of the political landscape, it is entirely possible that these objectives will be abandoned, despite likely pressure from the European Commission” for France to be in line with EU budgetary rules, estimates Moody’s.
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She notices that “French debt burden is highest among similarly rated peers”but that “France’s pace of deficit reduction will be slower than that of most of its European peers”. She estimates that the public debt “will slowly increase from 110.6% of GDP in 2023 to almost 115% of GDP by 2027”while the government forecasts quasi-stability by 2027.
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Moody’s therefore expects “to a deterioration in the sustainability of French debt”and underlines the risk of deterioration of the outlook and the rating “if we were to conclude that the deterioration of debt capacity was significantly greater in France” than in similarly rated countries. “A less strong commitment to fiscal consolidation would also increase downward pressure” on the rating, concludes Moody’s.
