France, Moody’s: early parliamentary elections are negative for ratings

France Moodys early parliamentary elections are negative for ratings

(Finance) – Le early parliamentary elections announced by Emmanuel Macron “the risks for fiscal consolidation increase, a negative factor for credit” of France. He states it Moody’swhich has an “Aa2” rating on the country, one step above ratings from Fitch and S&P Global.

According to analysts, given the polarized political environment in France, it is the winner of these elections is unlikely to obtain an absolute majority in parliament. Although a governing party that does not have an absolute majority can still pass financial and social bills without a vote in parliament using Article 49.3 of the French Constitution, this allows deputies to call a vote of no confidence. Losing this vote would force the prime minister and cabinet to resign and reject the government bill; the national assembly would not necessarily be dissolved (which would entail new elections). As a result, the risk of greater political instability in the future is high, especially since the national assembly cannot be dissolved within the first year of its mandate.

“There potential political instability represents a credit riskgiven the difficult fiscal framework that the next government will inherit”, says Moody’s. The outgoing government has already been forced to revise its deficit targets upwards to 5.1% of GDP (from 4.4%) for 2024 and to 4.1% (3.7%) in 2025, while maintaining its 2027 target at 3%. Furthermore, any spending cuts or revenue raising measures designed to achieve these goals will likely be concentrated in 2025, given the 2027 presidential elections.

The outlook, and ultimately the ratings, could change to negative should we conclude that the deterioration in debt affordability – which we measure as interest payments relative to revenue and GDP – will be significantly greater in France than its rating peers – reads the report – France’s high debt burden increases its exposure to higher financing costs, which could lead to a faster-than-expected increase in interest payments. A weakening the commitment to fiscal consolidation would also increase downward pressures on credit”.

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