Moody’s holds steady on France’s credit rating as country grapples with turmoil and higher yields

The agency kept France’s credit rating at Aa3, a level Moody’s still deems “high grade,” but it also maintained its negative outlook on the nation.

“The negative outlook reflects the increased risk that the fragmentation of France’s political landscape will continue to impair the functioning of the country’s legislative institutions,” Moody’s said in its report.

“This political instability, also visible in the current social tensions, risks hampering the French government’s ability to address key policy challenges such as an elevated fiscal deficit, rising debt burden, and durable increase in borrowing costs, thus leading to a more rapid weakening in the sovereign’s key credit metrics than we currently expect,” the agency added.

Moody’s noted that it could return France’s outlook to stable if its institutions can narrow the deficit.

Investors were anticipating Moody’s rating decision as France, the second-largest economy in the euro zone, contended with civil unrest and a sharp surge in bond yields.

This week, the nation’s 10-year bond yield surpassed 5% for the first time since 2002. The spread against German bunds is also at a 15-year peak.

Currently, France’s deficit-to-GDP ratio is at roughly 5.5% of its GDP, sharply above the 3% limit for member nations in the European Union. The country faces more than $1 trillion of debt that will mature by 2030. Just a month ago, the French finance ministry warned that the nation’s debt-to-GDP ratio is expected to hit 121.7% in 2027.

At the same time, France has been rocked by protests. Last weekend, more than 500,000 people marched to express their frustration against declining public services and high costs of living.

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