Moody's keeps France's rating at Aa3, but the negative outlook remains

The agency's unexpected decision

The rating agency Moody's on Friday evening kept France's sovereign rating at Aa3 with a negative outlook, although, according to Euronews, most markets had expected a downgrade. In its press release, the agency explained that the Aa3 rating is based on the assumption that a 2027 budget reducing the deficit will be adopted, and that borrowing costs and social tensions will ease somewhat in the coming months. The decision came amid a sharp rise in the yield on ten-year government bonds (OATs) and a tense situation in the country following the riots of October 17, which heightened investor anxiety.

The government's reaction

The government was quick to welcome the decision. Economy Minister Roland Lescure saw in it “recognition of the resilience of our economy and the credibility of the budget” and stressed that the goal of adopting a “responsible” budget by the end of the year, cutting the deficit to 5%, remains “untouchable.” Prime Minister Sébastien Lecornu said on the social network X that Moody's decision “refutes the doom-laden forecasts of numerous ‘experts’ and those who speculate on French debt,” and that the budget debates in the National Assembly “show creditors that a path exists.” He also mentioned the release of 10 million barrels of diesel fuel, which, he said, will affect prices at the pumps from November 1.

Experts: a breather, not a vote of confidence

A tightening of Moody's stance had seemed almost inevitable: a few hours before the verdict, Natixis rates strategist Théophile Legrand called a downgrade even the “base” scenario. He described the final decision as “a good short-term surprise for the government and the markets,” but warned that the negative outlook means: the risk of a downgrade remains fully real. He views the protests scheduled for October 24 as “a test for the government” and its ability to manage the situation after the riots of October 17.

The debt market under pressure

On Wednesday, the yield on ten-year French bonds exceeded 5.1% for the first time since 2002, compared with 3.2% before the start of the war between the US and Iran. BCA Research's chief Europe strategist Jérémy Pelozo notes that “the French debt market has become a genuine pariah”, citing the unsustainable trajectory of public finances, the return of inflation amid the war in the Middle East, “sluggish” growth and expectations of ECB rate hikes. He allows for a short-term “opportunistic return of buyers” to the OAT market, but calls French debt a “ticking time bomb” ahead of the presidential election, which is less than six months away. Jérôme Mathis, professor of economics at Paris-Dauphine University, sees the main warning signal in the gap with Germany: with Bund yields at around 3.4%, the excess of 5.1% represents “a special, purely French risk premium” and, in his view, the most serious warning for France since the European sovereign debt crisis.

Stocks and the budget debates

Stocks also suffered this week: Carrefour shares fell by more than 13% after the damage from the looting of stores on October 17 was estimated at 80–200 million euros, Kering plunged 16%, and Hermès dropped 7% amid weak quarterly results and ransacked boutiques. Meanwhile, the budget battle in parliament is intensifying: Public Finance Minister David Amiel said on Friday that “billions are pouring down like rain, and the planned spending cuts are automatically wiped out to applause,” and lamented that the social security system's deficit “has worsened by more than 5 billion” since the bill began being considered, directing his criticism primarily at the “National Rally.” Mathis also recalls how sensitive markets are to political scenarios: in the 2022 campaign, the rise in Jean-Luc Mélenchon's ratings coincided with doubts about the future of French debt, and today the prospect of a second round between Marine Le Pen and Mélenchon persists, along with La France Insoumise's proposal to cancel or zero out the rate on part of the debt held on the ECB's balance sheet.

Why it matters

The rating affirmation gives the French government time to adopt the 2027 budget and begin reducing the deficit, but the negative outlook means that pressure on the country's borrowing costs will persist. The level of OAT yields directly determines the cost of credit for the economy — Pelouzo has already described the consequences as 'particularly painful' for the real estate market. The nearest test points are the October 24 protests and the budget debates in the National Assembly: according to the experts cited, it is these that will determine whether the reprieve remains temporary.