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Moody's Keeps France Aa3 Rating With Negative Outlook Amid Protests And Planned Strikes
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Moody's kept France at Aa3 with a negative outlook amid protests. Moody's decision followed market expectations of a downgrade, maintaining the current rating.
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Moody’s holds, protests loom
Moody's kept France's sovereign rating at Aa3 with a negative outlook even as protests and riots after 17 October added to investor unease.
Moody's said the Aa3 rating is based on the assumption that a 2027 budget reducing the deficit will be adopted, while funding costs and social tensions will moderate somewhat over the coming months.
France's government aimed to reduce the budget deficit to 5% of GDP in 2027 from a projected 5.4% in 2026, while opposition lawmakers resisted the plans as the National Assembly was due to resume debating on Oct. 27.
Investors prepared for fresh demonstrations planned for Oct. 24 and a union-backed national day of strikes and protests set for Nov. 5, with anti-establishment Yellow Vest protestors among those calling for further rallies.
The yield on benchmark 10-year French government bonds, known as OATs, climbed 11 basis points Thursday to its highest level since 2002, pushing the spread over 10-year German Bunds to its widest level since November 2011.
Officials, economists, and markets
Economy Minister Roland Lescure said Moody's decision was "recognition of the strength of our economy and the credibility of the budget" presented by the government. Prime Minister Sébastien Lecornu welcomed on X that Moody's decision "confounds the doom-laden forecasts of many 'experts'" and of those who speculate on French debt. Théophile Legrand, rates strategist at Natixis, said the 24 October protests would be "a test for the government, particularly its ability to manage the situation" after the unrest on 17 October.
Jérémie Peloso, chief Europe strategist at BCA Research, argued that "it is above all the political deadlock" and the deterioration of the public finances that are igniting the bond market. Moody's warned that the negative outlook reflects the increased risk that the fragmentation of France's political landscape will continue to impair the functioning of the country's legislative institutions.
What is at stake next
Moody's said the 2027 budget process coincides with "some of the most extensive social protests France has experienced in many years," and it warned that unrest could constrain fiscal consolidation efforts. Moody's predicted that the next president and government are unlikely to be able to implement rapid fiscal consolidation "in light of social tensions" and a political environment that is likely to remain fragmented and muted GDP growth. Moody's also said France's debt burden is on track to hit 122% next year, and it added that a "significant and sustained fiscal effort" is required beyond the presidential elections to stabilize the debt burden.
The New York Times said investors continued to shun French debt, pushing the yield on 10-year bonds above 5 percent for the first time since 2002. France's debt interest bill was expected to jump further, competing with demands on France's budget including additional funding for schools and pensions for an aging population as demonstrations set to resume this weekend.
