Moody’s maintained France’s rating at Aa2 on Friday October 25, but downgraded the outlook from stable to negative. This decision “reflects the growing risk that the French government is unlikely to implement measures that would prevent larger budget deficits than expected,” the rating agency said in its press release.
Moody’s decision comes in the middle of a debate in the National Assembly on the 60 billion euros effort envisaged by the government in its draft budget for 2025 in order to reduce the public deficit to 5% of GDP and try to resume the control of a colossal debt. The Minister of Economy, Finance and Industry, Antoine Armand, indicated that he “takes note” of this decision, and affirmed, in a reaction sent to AFP, that “France has real economic forces” and is “capable of carrying out major reforms”.
“Certain (reforms) have already produced convincing results in terms of employment or economic attractiveness for our country. It is with this same energy that the government will act to restore our public finances,” assured the minister.
Increased risks
Moody’s, however, deplored a budgetary deterioration, which “exceeds (its) expectations and contrasts with that of governments of countries with similar ratings”. She further noted risks “increased by a political and institutional environment which is not conducive to a coalition around political measures likely to sustainably improve the budget balance”. The “Aa2” rating is the equivalent of 18 on a scale of 20 rating levels. It is a notch above the other two big agencies, Fitch and S & P (“AA-“).
The maintenance, at this stage, of this note, means that “the solidity of our economy remains recognized”, commented the Minister of the Budget, Laurent Saint-Martin, Friday evening in the hemicycle of the National Assembly, during the debates on the 2025 draft budget. “Mandatory levies on large businesses and exceptional contributions to individuals from the wealthiest are necessary”, but “France’s rating is put in a negative perspective because we first need a structural reform agenda”, he said, starting with pension reform.
Moody’s decision comes two weeks after that of Fitch, which placed France under “negative outlook” without revising its rating downward. The S&P agency must make its decision on November 29. In May, it lowered the French rating from “AA” to “AA-”.
Second budget item
For the moment, French debt still appeals to investors, but its interest rates are now at the level of those of countries like Portugal or Spain, which are considered more risky. “Our debt is sustainable, it is purchased, it is financed, it is viewed with a certain quality. If we want this to remain the case in the future, we must straighten out our accounts and reduce our public spending,” declared Antoine Armand , in an interview with AFP before the announcement of Moody’s decision.
The debt burden is today the second largest budget item behind education, with more than 50 billion euros, and it could become the first by 2027. This further reduces the financial room for maneuver. To preserve France’s credibility, the government wants in 2025 to reduce public spending, of which it is the champion in Europe, and increase taxes on businesses and wealthy taxpayers. However, he is struggling to convince a fragmented National Assembly, where he is in the minority. The International Monetary Fund (IMF) has called on France for more “clarity” on its economies.