The rating agency Moody's has chosen to keep the long-term sovereign debt rating of France at 'Aa3' unchanged and maintain the negative outlook. However, it warns that the ratification of the rating "is based on the assumption that a budget for 2027 will be approved" that contributes to reducing the deficit, along with a moderation in the coming months of financing costs and social tensions.
Thus, French debt continues to be framed in the high-quality range, despite the pressures that have pushed the yield on the country's 10-year bond above 5% for the first time since 2002, raising the risk premium to a 15-year high, in a context of social conflict and obstacles to advancing public accounts that contain the fiscal imbalance.
In its report, Moody's explains that France's 'Aa3' rating is supported by a broad, prosperous, and diversified economy, as well as by the high capacity of its public institutions. However, it acknowledges that the strength of the French institutional framework is subjected to repeated tests by a highly fragmented Parliament and by episodes of political and social instability, while the large and growing debt, along with the deterioration of payment capacity indicators, "constitute other key credit challenges."
The agency also emphasizes that state bond yields have risen more quickly than expected, while large-scale social protests have occurred, "which could limit fiscal consolidation efforts."
In this context, Moody's stresses that the current rating of France "is based on the assumption that a budget for 2027 will be approved that reduces the deficit, and that financing costs and social tensions will decrease in the coming months."
"Despite the complex political and social context, we start from the premise that, ultimately, a budget that reduces the deficit for 2027 will be approved, possibly by decree," the agency states.
Nonetheless, it warns that an intense and sustained fiscal adjustment will be essential beyond the presidential elections in April and May 2027 to strengthen public accounts and contain a debt ratio that will exceed 120% of GDP in 2027.
In this sense, although it foresees that the next president and the future Government will maintain the objective of continuing to reduce the deficit, Moody's considers it unlikely that they will be able to carry out an accelerated consolidation in the face of social tensions, a predictably fragmented political scenario, and moderate GDP growth, so the debt would continue to increase throughout the rest of the decade.
Likewise, it warns that the sharp increase in public debt yields in recent months "increases the risk of a greater weakening of the French debt repayment capacity," the main indicator that the agency uses to measure the fiscal solidity of the country.
In this way, it recalls that the negative outlook that has weighed on France's sovereign rating for a year reflects the greater risk that political fragmentation continues to hinder the normal functioning of legislative institutions. Coupled with the current social tensions, this scenario threatens to complicate the Government's ability to face key challenges such as a high deficit, a rising debt burden, and persistently higher financing costs.
In this context of negative outlook, Moody's sees it very unlikely that the 'Aa3' rating of France will improve in the short term and points out that it could downgrade the rating if it is confirmed that the capacity of legislative institutions to approve measures that prevent a rapid and prolonged deterioration of solvency has weakened.
"A lasting pause or reversal of key provisions of previous structural reforms, especially in terms of pensions, would also exert downward pressure on the rating," warns the agency, which also notes that an intensification of geopolitical risk could add downward pressure on the French credit profile.