Moody's Defies Market Expectations to Maintain France's Credit Rating at Aa3

International credit rating agency Moody's maintained France's sovereign credit rating at Aa3 and its credit outlook at "negative" on October 23 (local time), defying financial market forecasts.

As France's fiscal instability deepened, many market experts had anticipated that Moody's would downgrade France's rating by one notch to A1, aligning it with A+ ratings from other credit rating agencies Fitch and Standard & Poor's (S&P).

France has been struggling with fiscal consolidation due to a budget deficit reaching 5.4 percent of gross domestic product (GDP), political fragmentation with no majority party in the lower house, slowing economic growth, and rising interest rates.

In addition, nationwide protests against insufficient public sector investment and high inflation are spreading, fueling strong public opposition to austerity measures.

According to Bloomberg and Reuters, Moody's explained in a statement that "the process of handling the 2027 budget bill coincides with a period of the most widespread protests in recent times," adding that "despite the difficult political and social conditions, our baseline assumption is that the 2027 budget bill to reduce the fiscal deficit will ultimately be adopted."

The government of Emmanuel Macron, cornered by fiscal instability and expanding protests, has bought some breathing room by avoiding an additional credit rating downgrade.

Following Moody's decision, Prime Minister Sebastien Lecornu evaluated that "today's decision is a recognition of the resilience of our economy and the credibility of the budget presented by the government."

However, the French government's challenges remain unchanged.

Prime Minister Lecornu previously proposed a budget aimed at improving public finances by increasing tax revenues and significantly curbing spending, but its passage remains uncertain due to a divided parliament.

Under the constitution, the government can pass a budget without a parliamentary vote when deemed an emergency, but doing so could risk the government facing a motion of no confidence in parliament.

On October 23, the revenue portion of the government's social security budget bill was voted down in the lower house, sending the original bill to the Senate.

The lower house is scheduled to begin debates on major budget bills starting next week.

French government bond yields remain at high levels.

On October 22, the yield on 10-year French government bonds rose to 5.14 percent, the highest level since 2002, and the spread with the yield on 10-year German government bonds, considered a safe-haven asset, widened to 1.78 percentage points.

Mark Dowding, Chief Market Strategist at RBC BlueBay Asset Management, told Reuters that if the three major international credit rating agencies further downgrade France's credit rating after the presidential election, "things could get much worse from there."
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