Moody’s has issued a warning that France’s sovereign rating is at risk if continued political deadlock leads to a significant deterioration in the country’s fiscal and debt metrics.
The rating agency indicated that France’s outlook could be lowered to negative from stable if debt servicing costs become less affordable compared to its peers, according to Bloomberg.
Political uncertainty and financial implications
France is currently facing political uncertainty after elections that resulted in a hung parliament. No party or coalition has secured an absolute majority in the National Assembly, leaving lawmakers scrambling to form a stable government. The situation has left France’s financial future — and bond investor confidence — in limbo, according to Bloomberg.
Moody’s analysts described the financial consequences of the current political landscape as credit negative, saying that “weaker commitment to fiscal consolidation could add to credit pressures.”
The unprecedented political situation in France creates challenges for effectively managing the country’s debt burden, the agency said.
Debt affordability concerns
Moody’s stressed that France’s high debt burden increases its vulnerability to higher financing costs. This could lead to a faster-than-expected increase in interest payments on government bonds. Debt sustainability now has greater importance in Moody’s assessment of France’s credit profile due to the country’s reserve currency status.
Despite the European Central Bank’s plans to cut interest rates by the end of the year, borrowing costs in France have risen since French President Emmanuel Macron called for early elections last month.
On Tuesday, French 10-year bond yields rose 5 basis points to 3.22%, pushing the risk premium on safer German assets to 64 basis points, up from around 50 basis points before the election was announced.
Moody’s warned that rolling back fiscal reforms implemented by Macron and his allies since 2017 could further damage France’s credit rating.
