Calls for a downgrade are mounting, but Moody's Corporation (MCO.US) "spares" France: maintains Aa3 rating, but keeps negative outlook.

France narrowly avoided a downgrade in a closely watched credit rating review. On Friday, October 23, Moody's Corporation (MCO.US) announced it was maintaining France's Aa3 rating unchanged, offering temporary breathing room to the eurozone's second-largest economy, which is mired in debt pressure, political deadlock, and social unrest. Moody's Corporation noted in its statement that France's diversified economic structure and strong public institutions support the existing rating, but maintained the outlook at negative, citing political instability that will continue to constrain fiscal consolidation efforts. Moody's Corporation said the maintenance of the Aa3 rating is based on the baseline assumption that France will ultimately pass a deficit-reduction budget plan, and expects that "financing costs and social tensions will ease somewhat in the coming months." Markets had already largely priced in a downgrade expectation, with the spread between French and German 10-year government bonds once widening to 178 basis points, hitting the highest level since the eurozone debt crisis, while France's 10-year benchmark yield also climbed to 5.14%, the highest since July 2002. Moody's Corporation's decision to maintain the rating may help temporarily stem further increases in borrowing costs, but analysts warn that given the deep-seated fiscal and political risks that remain unresolved, market pressure will be difficult to fundamentally dispel. Downgrade Pressure Mounts, Rating Hangs by a Thread The rating maintenance keeps Moody's Corporation's rating on France one notch above those of S&P (SPGI.US) and Fitch. Both S&P and Fitch downgraded France to A+ in 2025, citing deteriorating public finances and political instability. Moody's Corporation itself also downgraded France from Aa2 to Aa3 in late 2024, placing it under a negative outlook thereafter. Moody's Corporation acknowledged in this statement: Slowing growth and widening deficits have pushed France's debt burden above previously expected levels, and bond yields have risen faster than anticipated as well. Meanwhile, the outbreak of large-scale social protests was also explicitly cited, which Moody's Corporation believes will constrain fiscal consolidation. It is worth noting that Moody's Corporation specifically stated that this conclusion is not a formal credit rating action and does not represent a signal of whether rating action will be taken in the near term. Fiscal Pressure and Social Unrest Intertwine France's current fiscal situation stands out particularly within the eurozone. This year's budget deficit is expected to reach about 5.4% of GDP, far exceeding the EU's 3% ceiling and the eurozone average, with public debt approaching 120% of GDP. The International Monetary Fund forecasts France's economic growth at only 0.4% this year, significantly below the eurozone's overall 1.1%. The debt financing structure also amplifies market vulnerability. According to EU data, about 55% of France's government bonds were held by overseas investors last year, far higher than the US at 31% and Japan at 13%. This means any wavering of international investor confidence could quickly transmit to borrowing costs. Meanwhile, social pressure is intensifying. Over the weekend, large-scale demonstrations erupted in multiple French cities, with more than 500,000 people participating in protests against the high cost of living; some areas descended into riots, public buildings were attacked, and shops were looted. Authorities are striving to prevent similar scenes from recurring this weekend. Budget Passage Prospects Full of Uncertainty French Prime Minister Sbastien Lecornu has proposed the 2027 fiscal bill, aimed at significantly cutting spending and raising tax revenue to keep the deficit target at 5% of GDP. However, since the government does not hold a majority in parliament, the bill's prospects are highly uncertain. France's National Assembly on Friday rejected the "revenue" portion of the 2027 social security budget bill, sending the original draft to the Senate for review, while the lower house will continue debating the main budget bill next week. Meanwhile, opposition parties lack willingness to compromise ahead of elections, having removed some proposed spending cuts and added new expenditure items. Moody's Corporation stated that "the 2027 budget process coincides with France's largest wave of social protests in years," but its baseline assumption is that the deficit-reduction budget "will ultimately be passed, perhaps implemented by executive order." French Finance Minister Roland Lescure responded that Moody's Corporation's decision to maintain the rating "recognizes the soundness of our economy and the credibility of the budget plan proposed by the government." 2027 Election Outlook Adds Uncertainty, Rating Path Remains Risky Moody's Corporation explicitly stated that France must continue to pursue "significant and sustained fiscal consolidation efforts" after the presidential election in April-May 2027 to put public finances on a more solid trajectory and stabilize the debt scale, which will then exceed 120% of GDP. Political uncertainty is the core risk that markets continue to focus on. After the snap election in 2024 produced a hung parliament, successive governments have struggled to advance budget legislation and fiscal reform. The fiscal policy positions of far-right leader Marine Le Pen and left-wing leader Jean-Luc Melenchon, who currently lead in polls, have both raised market concerns about future policy direction. Mike Bell, head of market strategy at RBC (RY.US) BlueBay Asset Management, warned that if Moody's Corporation, S&P, and Fitch all downgrade France to BBBjust one notch above junkafter the presidential election, it could force institutional investors with rating floors to passively sell French bonds, and the situation would "really start to look much uglier." The next key milestone is S&P's regular review of France's rating on November 27. In addition, Scope Ratings has already issued a downgrade on France this month, and Morningstar (MORN.US) DBRS has also revised its outlook to negative, meaning France's rating pressure has not been eliminated in the near term. This article is reproduced from "Wall Street Insights," author: Bao Yilong, GMTEight editor: Li Cheng.