France rating outlook steadies as Moody’s keeps Aa3 amid budget risks

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France rating steady as Moody holds Aa3

Highlights

Moody’s maintains France’s Aa3 rating with a negative outlook, assuming 2027 budget adoption despite slower growth, higher deficit, and rising bond yields.
France’s 10-year bond yield hits 5 per cent for the first time since 2002, with the German spread widening to 1.7 percentage points, highest since 2011.
Macron’s minority government faces strong opposition to €43 billion in budget cuts and tax hikes, with Moody’s projecting a 5.2 per cent deficit for 2025.

Moody’s decision and budget assumptions

As reported by Financial Times, citing Moody’s, the ratings agency keeps France at Aa3 with a negative outlook on Friday, choosing not to cut the sovereign rating despite weaker growth and a wider deficit since its previous review.

Moody’s says it assumes that a deficit-reducing budget for 2027 will be adopted, while financing costs and social tensions will ease somewhat in the coming months. At the same time, it warns that conditions are worse than it expected only months ago, with slower growth, a higher deficit and faster-rising bond yields increasing France’s debt burden.

Prime Minister Sébastien Lecornu calls the decision a rebuttal to pessimistic forecasts and says the signal shows lenders that France still has a path forward. His government is trying to secure parliamentary approval for a 2027 budget that includes 43 billion euros in spending cuts and tax increases to bring the deficit to 5 per cent of GDP by year-end.

Market pressure and political constraints

Investor concern over France’s public finances continues to build, with debt nearing 120 per cent of GDP, the Eurozone’s third-highest level after Greece and Italy. France’s 10-year bond yield reaches 5 per cent this week for the first time since 2002, while the spread over Germany widens to about 1.7 percentage points, the broadest gap since 2011.

Macron’s minority government faces resistance from a united opposition that says the budget plan is too severe and could still block or topple the bill. The administration also has limited room to offer concessions to lawmakers or protesters seeking higher public-service spending and relief from elevated fuel costs.

Last year, Lecornu suspended a contested pension reform to raise the retirement age to 64 in order to win enough parliamentary support for the budget. The government has already dropped its earlier 2026 deficit goal of 5 per cent of GDP and now expects 5.4 per cent, while Moody’s projects a 5.2 per cent deficit next year and says weaker growth and the political difficulty of delivering the full scale of spending cuts remain key risks.

In our earlier coverage of France’s efforts to restore investor confidence, we examined how political uncertainty and higher borrowing costs were keeping markets focused on the country’s deficit-reduction path. We noted that officials argued fiscal consolidation toward a 3% deficit target by 2029 was still achievable, even as OAT yields rose on worries about whether parliament would pass a budget consistent with the government’s goals.

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