France Rating Outlook Cut to Negative by Moody’s on Deficit Woes

Moody's, a leading credit rating agency, has downgraded France's outlook to negative, citing concerns over the country's fiscal trajectory. This move reflects the increasing risk that France may struggle to implement measures to prevent sustained wider-than-expected budget deficits and a deterioration in debt affordability. The agency maintained France's credit rating at Aa2, supported by its large, wealthy, and diversified economy.

France's new finance minister, Antoine Armand, acknowledged the decision but maintained that the country is capable of carrying out "far-reaching reforms." He emphasized the country's economic strength and vowed to restore its finances. However, Moody's noted that the political and institutional environment in France is not conducive to coalescing on policy measures that will deliver sustained improvements in the budget balance. As a result, budget management is weaker than previously assessed.

The government, led by Prime Minister Michel Barnier, aims to bring the public sector deficit below five percent of gross domestic product next year, from an expected 6.1 percent in 2024. However, his deficit-slashing budget was presented to a hostile parliament, with vocal opposition even before its full details were known. France's annual budget debate has often triggered no-confidence motions, further complicating the government's efforts to consolidate public finances.

France's debt is expected to rise to close to 115 percent of GDP next year, compared to an EU debt target of 60 percent. In absolute terms, France's debt stood at over 3.2 trillion euros, having risen by about one trillion since President Emmanuel Macron took power in 2017. Earlier this month, Fitch Ratings also affirmed France's rating at AA- but revised its outlook from "stable" to "negative," pointing to heightened fiscal policy risks.

To address these challenges, France must take credible steps to tackle its high deficit and implement structural reforms that improve its public finances. The government should work to strengthen political institutions and governance structures to better manage public finances and maintain its credit rating. International cooperation and EU policies can also play a role in supporting France's fiscal consolidation efforts. By taking these steps, France can balance its budget without compromising economic growth and reassure credit rating agencies.