In a surprise announcement, Moody’s rating agency downgraded France’s debt rating early Saturday, hours after President Emmanuel Macron appointed a new prime minister in a bid to stabilize a government that has been rocked by months of political turmoil.
Moody’s decision — which cut France’s sovereign debt assessment to an Aa3 rating, three levels below the highest rating — will put pressure on the nation’s borrowing costs. It reflects doubt that a new government can mend a deteriorating fiscal situation that has made France one of the most financially troubled countries in Europe.
Mr. Macron tapped François Bayrou, a veteran centrist politician, on Friday as his fourth prime minister this year. Mr. Bayrou’s predecessor, Michel Barnier, was ousted days earlier by far-right and left-wing lawmakers over his plans to rein in France’s finances with a belt-tightening budget that included 60 billion euros ($63 billion) worth of spending cuts and tax increases.
The government collapse has heaped new burdens on France’s weak economy and left the country without a functioning budget. Mr. Bayrou now has the urgent task of having to finalize a stopgap measure to avoid a potential government shutdown before the new year.
Beyond that, he must also draft a new budget bill for 2025 and try to succeed where Mr. Barnier failed — by pushing it through a deeply divided Parliament at a time when investors have grown more worried about France’s creditworthiness. The Standard & Poor’s and Fitch Ratings agencies have also downgraded France’s debt.
Few expect Mr. Bayrou, one of Mr. Macron’s top allies, to stabilize France’s roiling politics. Moody’s said it saw a “very low probability that the next government will sustainably reduce the size of fiscal deficits beyond next year.” The situation raises the risk of what the ratings agency described as “a negative feedback loop between higher deficits, a higher debt load and higher financing costs.”
France, a cornerstone of Europe’s euro currency union, is grappling with a legacy of unbridled government spending under Mr. Macron since the coronavirus pandemic lockdowns.
The deficit has grown to 6.1 percent of economic output, double the euro area average. The national debt is over €3.2 trillion — more than 112 percent of the country’s gross domestic product and more than twice what is allowed under the euro currency union’s rules.
Interest payments on the debt are about €60 billion this year — more than France’s military budget — and Moody’s warned that the country’s borrowing needs would continue to rise. On Friday, the yield on France’s 10-year bond, a measure of borrowing costs, jumped to the second-highest in the eurozone after Italy.
Wrestling any savings has become a political minefield because of the new makeup of France’s Parliament after Mr. Macron held snap elections in the summer as part of a gamble to help stave off the rise of the far right. Voters ushered in a Parliament that was radically split among the political factions, which has proved destabilizing.
“No one knows more than I do how difficult the situation is,” Mr. Bayrou said on Friday. The deficit and the debt, he said, are issues that “pose a moral problem, not just a financial problem.”
Moody’s changed its outlook for French debt to stable from negative, but it warned that the “unprecedented political situation is testing the country’s institutional settings.”
The ratings agency said it could further lower its assessment of France “if the current gridlock were to persist.”
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