Moody's downgrades France's debt to Aa3: 'Public finances will weaken'

It came in the night. Just a few days after the appointment of Prime Minister François Bayrou. The agency Moody's waited until the end of the political crisis to downgrade the French debt. The rating has now dropped to Aa3, from Aa2, with the outlook changing to stable from negative.

The reading of the political crisis, on the financial front, is very negative, because it is not confined to the short term. The decision, Moody's explains in a statement, 'reflects our assessment that the country's public finances will weaken substantially in the coming years'. Political fragmentation is more likely to 'impede significant fiscal consolidation'. Above all, 'it is now highly unlikely that the next government will be able to sustainably reduce the size of fiscal deficits beyond next year' and there is therefore 'the risk of a lasting increase in borrowing costs, which would further weaken debt sustainability'.

The possibility is that a 'negative vicious circle between higher deficits, a higher debt burden and higher financing costs, against the backdrop of significant annual financing needs' will be created. Moody's expects in particular a deficit of 6.3 per cent of gdp in 2025 against the 5 per cent predicted, with some optimism after numerous concessions, by the manoeuvre designed by the Barnier government. In 2027, the deficit could fall to around 5.2 per cent. The public debt should thus rise from the current 113.3% of GDP to around 120% in 2027. The ratio of interest expenditure to revenue should rise from the current 4.4 % to 4.9 % in 2025 and to 5 % in 2026 and 2027.

The Aa3 rating is actually not that bad. It still reveals a 'very low' credit risk. Italy, at Baa3, is six grades below. The rating, the agency continues, "reflects France's significant credit strengths, including a large, rich and diversified economy that is the seventh largest globally. The resilience of the French economy is supported by a more favourable demographic profile than many other advanced economies. France's Aa3 ratings are also justified by strong and highly competent public institutions, although the unprecedented political situation is challenging the country's institutional system'. Moody's had so far a slightly higher rating than Standard&Poor's AA- (with stable outlook) and Fitch's AA- (with negative outlook). It therefore adjusted itself to the ratings of its competitors.

For the Bayrou government, however, things get complicated. The unscrupulousness with which the political forces voted to censure Barnier threatens to have serious consequences for the country. The Left had seen all the amendments it had managed to get through swept away by the former prime minister's decision to invoke Article 49.3 of the Constitution and thus nullify Parliament's vote. Marine Le Pen's right wing, on the other hand, had been given many concessions, but decided in an entirely political, if not propagandistic decision, to vote for the left-wing motion that, moreover, was not tender towards the Rassemblement national and what it called its obsessions.