Relief at Bercy: Moody’s does not sanction France

In Bercy, the news spread like wildfire in the afternoon among the handful of authorized people: France escaped being downgraded by Moody's. The rating agency maintained France's sovereign rating on Friday at the “Aa2” level with a stable outlook, judging the risk of default to be very low despite the recent deterioration of the country's public finances.

In a press release, Bruno Le Maire declared that he took note of this rating. “This decision should invite us to redouble our determination to restore our public finances and meet the objective set by the President of the Republic: to be below 3% deficit in 2027.” The minister intends to pursue a strategy based “on growth and full employment, structural reforms and the reduction of public spending.”

In reality, no one really believed in such an outcome. And for several weeks, Bruno Le Maire has been careful to free himself from short-term uncertainties to insist on his desire to restore public finances by... 2027. The speech will therefore have reassured the American institution. A few weeks before the European elections, this is very good news for the majority. A deterioration would have cast shame on its entire economic record.

However, the government seems to have grasped the extent of the public debt problem only a few weeks ago when INSEE revealed, at the end of March, the extent of the 2023 deficit, at 5.5%, therefore against an official forecast of 4 .8%. Since then there has been a flurry of announcements. After an initial freeze of 10 billion in credits, 10 billion in new savings must be found under the 2024 budget. Completing the 2025 financial year will require some 25 billion in savings. Colossal sums for a country that seems incapable of reforming itself. Despite the vagueness that reigns over the definition of future economies, Moody's therefore considers these commitments credible.

France's rating then remains among the safest awarded by Moody's, the equivalent of 18 out of 20. Sovereign securities indeed benefit from an ideal environment from a technical point of view. Abundant, French debt serves as a substitute for German and Dutch securities. The majority of investors also acquire securities through index funds, which, for the euro zone, automatically contain French debt. The market depth and liquidity of French securities finally correspond to the characteristics sought by Asian institutional investors.

These technical subjects dominate in an environment where investors anticipate rate cuts. “Deterioration, obviously that wouldn’t be good news. But the most important thing is that this should not have any consequences on the rates at which we finance ourselves, to the extent that the markets have already integrated the situation of our public finances", we reassured ourselves, in recent days, in Matignon. Without additional tension on the markets, the government is already anticipating an explosion in the debt burden, which would exceed 70 billion in 2027.

For its part, the Fitch rating agency, which downgraded France's sovereign rating last year, also left it unchanged on Friday evening, at the "AA-" level with a stable outlook. In a press release, the agency specifies that France's AA- ratings are supported “by a large and diversified economy, strong and effective institutions and macro-financial stability.”

On the other hand, public finances and, in particular, the high level of public debt in relation to GDP and the poor results in terms of budgetary consolidation, constitute for the agency a weak point in France's rating. However, Fitch had suggested at the start of the month that it did not intend to further lower this rating unless there was a “consequential” increase in debt.