Macro
Moody's leaves France at Aa3 with a negative outlook, defying expectations of a downgrade
The agency held off on a widely expected one-notch cut after Friday's close, but tied the rating to France passing a deficit-cutting 2027 budget.
HedgeWeekly News Desk ·
Moody's took no rating action on France after US markets closed on Friday, keeping the country's sovereign rating at Aa3 with a negative outlook, Il Sole 24 Ore reported. Most analysts had expected a one-notch cut, Reuters reported ahead of the decision, which would have brought Moody's into line with S&P Global and Fitch, both of which already rate France A+.
Moody's said the Aa3 rating rests on France adopting a 2027 budget that lowers the deficit, and on borrowing costs and social tensions easing somewhat over the coming months. The 2027 budget aims to bring the deficit down to 5% of output from 5.4% this year, but the lower house has already removed some of its main savings measures, according to Reuters.
The decision comes at the end of a rough week for French debt. The 10-year yield reached 5.14%, its highest since July 2002, and the premium over German Bunds hit a 15-year high on Thursday, Reuters reported. Goldman Sachs put the 10-year spread at 173 basis points at Thursday's close, the widest since November 2011, with France trading through Italy. France's outlook at Moody's has been negative since October last year; Fitch last acted on August 28 and S&P on May 29, according to the French Treasury agency.
Why it matters: The hold removes an immediate trigger for forced selling or collateral repricing when OAT markets reopen on Monday, but Moody's has made the rating explicitly conditional on fiscal and political progress, so the negative outlook keeps a cut on the table. The next tests are the National Assembly's budget votes, third-quarter GDP on October 30 and strikes planned for November 5, ahead of a presidential election on April 18 and May 2 next year. Funds holding French government bonds, French banks or euro credit should watch whether spreads narrow on the news or keep pricing France below its ratings.