Debt: Moody's spares France, "a brief respite", not a "vote of confidence"

An unexpected piece of good news: Moody's has left France's sovereign debt rating untouched. Although markets had widely expected a downgrade, the New York-based agency on Friday evening maintained its assessment at Aa3 with a negative outlook. France's ten-year borrowing rate (OAT) has soared this week, while the country is under strain after the riots of 17 October, which have added to investor unease.

Moody's nevertheless justified its stance in a statement, explaining that "the Aa3 rating is based on the assumption that a 2027 budget reducing the deficit will be adopted, while funding costs and social tensions will moderate somewhat over the coming months". As soon as the announcement was made, the government rushed to hail the decision. Economy Minister Roland Lescure was the first to react.

He sees in it "recognition of the strength of our economy and the credibility of the budget" presented by the government. In his view, the goal of adopting by the end of the year a "responsible" budget that brings the deficit down to 5% is "non-negotiable". In a more defensive tone, Prime Minister Sébastien Lecornu welcomed on X the fact that Moody's decision "confounds the doom-laden forecasts of many 'experts'" (his quotation marks) "and of those who speculate on French debt".

According to the head of government, the ongoing budget debate in the National Assembly "shows our creditors that there is a way forward". He also highlighted a measure which, in his view, reflects the seriousness of current economic policy: "With the release of 10 million barrels of diesel we will have an impact on pump prices from 1 November, without playing fast and loose with the public finances". "A welcome surprise"A tougher stance from Moody's had nonetheless appeared inevitable.

Speaking to Euronews a few hours before the verdict, Théophile Legrand, rates strategist at Natixis, even saw it as the "central" scenario. He stressed, however, that a downgrade would have been "largely" anticipated by the markets and that its announcement might therefore "not on its own trigger a pronounced reaction". The decision ultimately taken is "a welcome short-term surprise for the government and the markets", notes the Natixis expert, following the announcement, from the corporate and investment banking arm of the BPCE group.

This relative leniency should not, however, be interpreted as a vote of confidence in the trajectory of the public finances, he warns. Moody's "indeed maintains a negative outlook, which means that the risk of a downgrade remains fully present". The 24 October protests, "a test for the government"The second act of the protests, scheduled for this Saturday, will be closely watched by investors.

"The mobilisation expected this weekend will be a test for the government, particularly its ability to manage the situation" after the unrest on 17 October, says Théophile Legrand. And even if the chaos seen last week is avoided, it would be more of a respite than a real relief. "The most worrying signal is the persistence of a climate of political uncertainty, likely to maintain pressure on French bonds", the economist points out.