France spared Moody’s rating downgrade as it struggles with unrest

Paris: Moody's spared France from a credit rating downgrade on Friday, relieving pressure on a government grappling with social unrest and financial strain. Moody's concluded a periodic review of its rating, maintaining France's Aa3 rating, which has had a negative outlook since last October. Bond markets had been anticipating a downgrade, which would have aligned Moody's rating with Standard & Poor's and Fitch.

The French finance ministry stated that Moody's retaining the rating highlighted the credibility of the government's 2027 budget, aimed at stabilizing public finances. However, the government faces challenges in passing the budget in parliament, where opposition parties may reject the legislation and force a no-confidence vote. The Aa3 rating assumes the adoption of a deficit-reducing budget for 2027, with financing costs and social tensions expected to lessen in the following months.

French borrowing costs already surpass those of lower-rated counterparts like Italy, driven by concerns over the budget deficit and upcoming presidential elections on April 18 and May 2 next year, where polls suggest the far-right could win. Violent protests have intensified over underfunded schools, escalating into riots during cost-of-living demonstrations.

The government has resisted increasing school funding or raising the minimum wage, with further protests planned. Opposition parties in parliament show little willingness to compromise on key budget savings measures, adding to the political difficulty. Rushabh Amin, a portfolio manager at Allspring Global Investments, suggested waiting to see how the narrative develops over the next six months leading up to the election, as this would have a more significant impact on the spread.

Mike Bell, head of market strategy at RBC BlueBay Asset Management, warned that pressure on French debt could escalate if Moody's, S&P, and Fitch all downgrade France to BBB, potentially leading to significant losses for investors with rating limits.