Moody's is due to update its rating on France's debt after U.S. markets close on Friday, and analysts expect a downgrade. French borrowing costs have risen to multi-decade highs while protests spread across the country.
Moody's is due to update its rating on France's debt after U.S. markets close on Friday, and the expectation is that the verdict won't be positive. The agency does not have to change anything if it feels the current rating is still valid.
Protests and a negative outlook
The review comes as sometimes-violent protests have broken out across the second-biggest economy in the European Union over the rising costs of living and general political dissent. A curfew was extended in Paris, and Lyon and Marseille announced outright bans on all protests.
Moody's has maintained an Aa3 rating on France since Dec. 2024. In the following October, it changed the outlook from stable to negative, citing the risk that political fragmentation would keep impairing the functioning of the country's legislative institutions.
Yields hit a level last seen in 2002
French yields have risen into the decision. The 10-year government bond yield rose to 5% on Thursday, a level last seen in 2002, and it was hovering just above that mark early on Friday.
A renewed bout of selling also pushed the spread between the French and German 10-year yields to its widest in close to 15 years. The French 10-year yield also edged above the 10-year U.S. Treasury yield for the first time since 2013.
What analysts expect
Andrzej Szczepaniak, senior European economist at Nomura, expects Moody's to downgrade France to A1 with a stable outlook. That would bring the Moody's credit rating in line with S&P and Fitch.
Brent Donnelly, president of Spectra Markets, shares that expectation. He said a surprise would be either an affirmation of Aa3 with a negative outlook or a two-notch cut. According to MarketWatch: "Two notches would be a barnburner."
Budget pressure and contagion
The French government has not yet passed its 2027 budget, and it faces pressure over a deficit getting near to 5.4% of gross domestic product, above the EU's limit of 3%.
Robin Brooks of the Brookings Institution said the turmoil so far has spread to high-debt eurozone members such as Italy and Spain, while money has flowed into U.S. Treasurys and low-debt European countries like Germany, Sweden and Switzerland. He said the French debt blow-up could end, pointing to a sell-off in oil prices as a potential trigger.
Source: MarketWatch
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