Moody’s warns on French debt outlook amid political gridlock
France’s sovereign rating is at risk if political wrangling sees its fiscal and debt metrics materially worsen, according to Moody’s Investors Service.
The rating company warned in a note published late Monday that the nation’s outlook may be lowered to negative from stable if it observes a larger deterioration in the affordability of debt-servicing costs compared to peers. Those remarks echo a similar caution from April.
France is grappling with the aftermath of a bruising election campaign that saw no party or alliance win an absolute majority in the National Assembly. Lawmakers are now jockeying to become prime minister, leaving France’s finances — and bond investors — in limbo until greater certainty emerges about who will govern the country and how they will tackle its unsustainable debt load.
The election results put France in “an unprecedented situation,” Moody’s analysts including Sarah Carlson wrote, describing the fiscal implications as credit negative. “A weakening commitment to fiscal consolidation would increase downward credit pressures.”
France’s elevated debt burden heightens its exposure to higher funding costs, and could lead to a faster-than-expected rise in interest payments on the nation’s bonds, Moody’s warned. Debt affordability has a larger weight in the company’s assessment of France’s credit profile given its reserve currency status.
While Europe’s interest rates are starting to come down, with the region’s central bank set to lower rates again by year-end, France’s borrowing costs have jumped since President Emmanuel Macron’s decision last month to call a snap poll.
French 10-year yields were five basis points higher at 3.22% on Tuesday, lifting their risk premium over safer German assets to 64 basis points, up from around 50 basis points prior to the vote being called.
A reversal of financial reforms implemented since 2017 by Macron and his allies could further damage the country’s rating if this policy choice was determined to have “materially negative medium-term implications for France’s growth potential and/or fiscal trajectory,” Moody’s analysts wrote.
Moody’s affirmed France at Aa2 — its third-highest grade — with a stable outlook in April.
