“Moody's decision tempers concerns a little”: the gap between French and German rates records its sharpest decline since 2020

The gap between French and German ten-year borrowing rates, a barometer of investor confidence in France's debt, recorded its biggest drop in one session on Monday since March 2020, after the country's rating was maintained by the Moody's agency. This gap between French and German ten-year borrowing rates, which measures the extra required by investors to lend to France rather than to Germany, considered the safest borrower in the euro zone, fell by around 0.14 percentage points, to 1.54 points, according to Bloomberg data. It reached 1.74 points at the close last week, and up to 1.78 points during the session, its highest level since 2011.

“Moody's decision somewhat moderates concerns about the French budget and the cost of financing,” commented Guillaume Chaloin, director of equity management at Delubac AM. The French ten-year borrowing rate has fallen back below the symbolic 5% mark, to 4.90%, compared to 5.02% on Friday. It exceeded this threshold last week for the first time since 2002.

The German rate for the same maturity remained almost stable, at 3.37%. Moody's believes in an improvement in the situation The Moody's agency maintained France's rating at Aa3 on Friday evening, an assessment of the country's capacity to repay its debt, while a reduction was widely expected. However, it retained a negative outlook, which raises the threat of a deterioration.

Moody's explains that its Aa3 rating, which characterizes "good quality" debt, "is based on the assumption that a 2027 budget reducing the public deficit will be adopted, while (...) social tensions will moderate somewhat in the coming months". Its competitors Fitch and S&P have for several months classified France in A+ (higher average quality debt).

The Minister of Economy and Finance, Roland Lescure, estimated in a press release that Moody's decision was notably "a call for responsibility through the adoption (...) of a budget reducing our deficit to 5% of GDP". Moody's instead sees it at 5.2%, after 5.4% this year, due to GDP growth "slightly weaker than government projections", which for its part forecasts 1%.

The agency's leniency was not at all expected by economists who anticipated its alignment with Fitch and S&P. “Moody's decision is difficult to understand, to say the least,” commented Anthony Morlet-Lavidalie, economist at Rexecode, “and we almost end up wondering what it takes to downgrade France.” “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”, he continued.

Machine-translated from French