Moody's beats market expectations and maintains France's credit rating at Aa3

French government takes a breather, but financial instability continues

(London = Yonhap News) Correspondent Kim Ji-yeon = International credit rating agency Moody's maintained France's national credit rating at Aa3 and the rating outlook at 'negative' on the 23rd (local time), contrary to the financial market outlook.

As France's financial instability worsens, many market experts predicted that Moody's will downgrade France's rating to A1, which is the same level as A+ from other credit rating agencies Fitch and Standard & Poor's (S&P).

France is experiencing difficulties in fiscal consolidation due to a fiscal deficit of 5.4% of gross domestic product (GDP), political division with no majority in the House of Representatives, slowing economic growth, and rising interest rates. In addition, protests against lack of public sector investment and high prices are spreading across the country, and public opinion against fiscal austerity is high.

According to Bloomberg and Reuters, Moody's said in a statement, "The process to process the 2027 budget is taking place at a time of the most widespread protests in recent times," and added, "Despite difficult political and social conditions, our basic assumption is that the 2027 budget that reduces the fiscal deficit will eventually be adopted."

Emmanuel Macron's government, which is in a difficult situation due to financial instability and widespread protests, can take a breather by avoiding a further credit rating downgrade.

Prime Minister Sebastien Lecornu said after Moody's decision, "Today's decision recognizes the solidity of our economy and the reliability of the budget plan presented by the government."

However, the French government's difficulties remain the same.

Prime Minister Le Cornut previously proposed a budget plan to improve finances by increasing tax revenues and drastically curbing spending, but passage is uncertain due to division in the National Assembly. Under the Constitution, the government can pass a budget without a vote in parliament when it determines that the situation is urgent, but in this case, the government may be subject to a vote of no confidence in parliament.

On the 23rd, the revenue portion of the government's social security budget was rejected in the House of Representatives, and the original bill was transferred to the Senate. The House of Representatives will begin debating major budget proposals starting next week.

French government bond interest rates remain high. On the 22nd, the interest rate on 10-year French government bonds rose to 5.14%, the highest since 2002, and the gap between the interest rates on 10-year German government bonds, considered a safe asset, widened to 1.78 percentage points.

Mike Bell, head of market strategy at RBC Blue Bay Asset Management, told Reuters that if the three major international credit rating agencies downgrade France's credit rating further after the election, "things could get much worse from there."