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French bonds and stocks came under renewed pressure on Monday after Moody’s downgraded the country’s credit rating, citing a “materially weaker” economic outlook and political instability that will make it tougher to reduce Paris’s large budget deficit.
The country’s 10-year borrowing costs were up 0.01 percentage points in early trading to 3.04 per cent, as the price of the debt fell, while benchmark German debt gained.
As a result, the additional interest rate Paris pays compared with Berlin rose to 0.78 percentage points, moving back towards a recent 12-year high.
The country’s stocks also underperformed European peers, continuing a recent trend. The Cac 40 index was down 0.6 per cent in early trading, a deeper fall than Germany’s Dax, while Spain’s Ibex 35 was moderately up.
On Saturday, Moody’s lowered France’s long-term issuer rating from Aa2 to Aa3, saying its fiscal outlook had darkened following the fall of Michel Barnier’s government over a belt-tightening budget.
Barnier’s budget, which was rejected by lawmakers, had aimed to begin narrowing France’s deficits to 5 per cent of national output by the end of 2025 from about 6 per cent by the end of 2024.
Analysts now say that goal will be out of reach, even though France’s new Prime Minister François Bayrou has said he will make tackling the debt burden a priority, calling it a “moral problem”. But given the opposition in parliament to cutting spending in any way that would affect households, achieving a meaningful reduction in the deficit will be an uphill task.
“In a highly politically fragmented environment, there is now very low probability that the next government will sustainably reduce the size of fiscal deficits beyond next year,” wrote Moody’s in its note.
Bayrou’s first task will be passing an emergency stop-gap budget this week or next to avoid a government shutdown since the parliament is unlikely to finalise a full budget for 2025 before the end of the year.
The Moody’s downgrade brought it into line with the AA- rating put on France by rivals Fitch and S&P Global Ratings.
Deutsche Bank’s Jim Reid said Moody’s “commentary on future deficits is quite damning”, but said the move to a stable outlook from the rating agency — and the fact that it was playing catch-up with peers — would restrain market reaction.
The country’s political crisis has dragged on its bond and stock market and even the euro in recent weeks, as investors grow anxious about France’s debt load, its deficit and political instability.
French stocks are down 2 per cent this year, against an 8 per cent rise in the Europe-wide benchmark Stoxx 600 index.
