Moody’s is concerned about the consequences on public debt – L’Express

the warning from the Moodys agency – LExpress

The dissolution of the National Assembly announced on Sunday by Emmanuel Macron increases the risks and uncertainty regarding France’s budgetary control, according to the rating agencies Fitch and Moody’s, the latter seeing this as a risk for the rating.

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 in 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 the National Rally “more than 200” .

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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 a credit risk”, underlines Moody’s, while the outgoing government has already had to revise its public deficit forecasts sharply for 2024 and 2025, while maintaining its forecast of a return to 3% of GDP. in 2027.

“The burden of the French debt”

“Given the instability of the political landscape, it is entirely possible that these objectives will be abandoned, despite probable pressure from the European Commission” for France to be in line with EU budgetary rules, estimates Moody’s . She notes that “French’s debt burden is the highest among its similarly rated peers”, and that “France’s pace of deficit reduction will be slower than that of most of its European peers”. It estimates that 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 “a deterioration in the sustainability of French debt”, and underlines the risk for the outlook and for 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 budgetary consolidation would also increase downward pressure” on the rating, concludes Moody’s.

For its part, Fitch believes that the dissolution “has no immediate impact on the rating” but “increases uncertainty around fiscal consolidation and new economic reforms”. The agency forecasts a debt of 112.8% of GDP by 2027 and underlines that a “significant and persistent increase in debt”, notably a consequence of “higher than expected public deficits”, “could lead to action negative rating”.