“A difficult decision to understand”: why, against all expectations, Moody's did not downgrade France's rating despite the slippage in its public finances

Nobody saw it coming. To everyone's surprise, Moody's refrained on Friday from downgrading the rating of the French debt, effectively maintaining it at Aa3 ("good quality debt") with a negative outlook despite France's budgetary setbacks and its political instability. Moody's thus remains the only one of the three main agencies to assign a "double A" to France, Fitch and S&P having already downgraded it to A1 ("higher average quality debt").

“Difficult to understand” If the American agency has once again shown leniency towards France despite its deficit expected at 5.4% of GDP this year and its debt of 119%, it is because it “starts from the hypothesis that a 2027 budget reducing the public deficit will be adopted, while (...) social tensions will moderate somewhat in the coming months”, she indicated. An optimism that struggles to convince economists: "Moody's decision is difficult to understand, to say the least," Anthony Morlet-Lavidalie, economist at Rexecode, commented to AFP, "and we almost end up wondering what it takes to degrade France."

Moody's has indeed been lenient on several occasions with Paris, whose public finances continue to deteriorate. However, "a sovereign rating must reflect the credit quality of a borrower, not give them the benefit of the doubt indefinitely", at the risk of then having to carry out "a brutal downgrade", recalls Anthony Morlet-Lavidalie. Director of economic studies at the IÉSEG business school, Éric Dor assured that even if lowered to A1 (Moody's equivalent of A+ among its peers), "France's rating would still be overestimated compared to other European countries such as Spain and Portugal".

And for good reason, Paris now borrows at almost 5% over 10 years, compared to 4% for Madrid and 3.9% for Lisbon. Our neighbors on the Iberian Peninsula, however, no longer have “double A”. “Simply a respite” So how can we explain that Moody’s is not aligning itself with its two competitors?

“The only difference between Fitch, S&P and Moody's is that Moody's assumes that we will return to a budget deficit of 5%, that the debt trajectory will soften and that the social protests will calm down,” notes Daniel Gerino, president of Carlton Sélection, on BFM Business. "Moody's nevertheless says that this is not a certainty but a supposition. It gives the government a chance to catch up.

" "We are simply giving France a respite," confirms Chritospher Dembik, investment strategy advisor at Pictet AM. But the gamble is daring knowing that few people believe in the government's ability to pass a budget to significantly reduce the deficit in 2027. This is what makes some observers say that the executive could have made a deal with Moody's.

At least, the agency's decision "gives credence to the rumor according to which the government has reached an agreement with the rating agencies to avoid a downgrade of the French rating, on condition of reducing the deficit below 5% of GDP in 2027. True or false? Impossible to know", continues Christopher Dembik.

Machine-translated from French