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Investing.com -- Moody’s Ratings changed France’s outlook to negative from stable on Friday, while affirming the country’s Aa3 ratings.
The rating agency cited increased risks that political fragmentation will impair the functioning of France’s legislative institutions, potentially hampering the government’s ability to address key challenges including an elevated fiscal deficit, rising debt burden, and increased borrowing costs.
Moody’s also expressed concern about the potential long-lasting reversal of previously adopted structural reforms, particularly the 2023 pension reform. The agency warned that an extended suspension of this reform would exacerbate fiscal challenges and negatively impact economic growth by reducing labor supply.
The affirmation of the Aa3 ratings reflects France’s significant economic strength, supported by its wealthy and diversified economy. Sound household and corporate balance sheets and a robust banking sector contribute to macroeconomic stability, according to Moody’s.
In a related action, Moody’s affirmed the Aa3 backed foreign-currency and local-currency long-term issuer ratings on the Société de Prise de Participation de l’Etat (SPPE) and changed the outlook to negative from stable.
France’s local and foreign-currency ceilings remain unchanged at Aaa, reflecting benefits from the euro area’s institutional framework and crisis-management mechanisms.
The rating agency noted that France’s debt affordability metrics will gradually weaken in coming years as debt issued at very low rates matures and needs to be refinanced at higher costs.
Moody’s indicated that an upgrade is highly unlikely in the near term given the negative outlook. However, the outlook could return to stable if recent difficulties in legislative institutions prove temporary or if there is a resumption of pension reforms.
A downgrade could result from further evidence that legislative institutions are durably weakened in their ability to tackle key challenges, continued difficulties in reducing the fiscal deficit, or a lasting reversal of structural reforms.
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