Background on Moody’s and its Role
Moody’s is one of the leading global credit rating agencies, providing assessments on the creditworthiness of various entities, including sovereign governments. Its ratings and outlooks are closely watched by investors, financial institutions, and governments alike.
Moody’s Decision on France
On a recent Friday, Moody’s maintained France’s sovereign credit rating at Aa3 (debt of good quality), but it downgraded the outlook from “stable” to “negative.” This move serves as a warning signal for France, which is currently engaged in heated budgetary debates within its parliament.
Contextualizing Moody’s Action
Moody’s decision comes after other major credit rating agencies, Fitch and S&P Global, had already downgraded France’s sovereign debt rating due to political instability and fiscal challenges. Fitch lowered France’s rating on September 12, followed by S&P Global the previous week, both reducing it from a high level (A+) to “A+ (debt of superior medium quality).”
Moody’s Rationale for the Downgrade
Moody’s explained that the negative outlook adjustment aims to reflect “the growing risks of a weakening of institutions and governance in France, as well as a partial rollback of structural reforms.”
France’s Political and Fiscal Landscape
Since 2017, France has been experiencing a deep political crisis. The parliament lacks clear majorities and has already toppled two prime ministers of President Emmanuel Macron while they sought support for their budgetary plans.
Furthermore, France faces immense pressure to reduce its high public debt, which hovers around €3.4 trillion (115-6% of GDP) and its deficit, projected at 5.8% of GDP in 2024.
Current Government’s Fiscal Efforts
The current Prime Minister, Sébastien Lecornu, proposed a budget plan featuring a fiscal effort of €30 billion (approximately $34.9 billion) achieved partly through public spending cuts.
Balancing Act Amidst Opposition
To prevent a swift collapse of his government, the center-right Prime Minister agreed to postpone the 2023 pension reform demanded by the opposition, linking it to the adoption of the budget now under parliamentary debate.
Key Questions and Answers
- What is Moody’s and why does its rating matter? Moody’s is a credit rating agency that assesses the creditworthiness of various entities, including governments. Its ratings and outlooks are crucial for investors, financial institutions, and governments as they indicate the likelihood of timely debt repayment.
- What prompted Moody’s to downgrade France’s outlook? Moody’s cited growing risks of weakening institutions and governance in France, as well as potential rollbacks of structural reforms, as reasons for the downgrade.
- What are the fiscal challenges facing France? France is under pressure to reduce its high public debt (around €3.4 trillion or 115-6% of GDP) and deficit (projected at 5.8% of GDP in 2024).
- How is the French government addressing these fiscal pressures? The current Prime Minister, Sébastien Lecornu, proposed a budget plan with a fiscal effort of €30 billion (approximately $34.9 billion) through public spending cuts and other measures.
- What is the political situation in France? France has been experiencing a deep political crisis since 2017, with the parliament lacking clear majorities and having already toppled two prime ministers while seeking support for budgetary plans.
