France, with its still uncertain political destiny, risks worsening its fiscal and debt situation. What can happen according to Moody’s analysis?
Although the feared post-vote financial earthquake did not occur in France, the country remains at high risk of instability according to Moody’s.
According to the agency, the French sovereign rating is threatened by political tensions, which if not resolved in the short term could cause a substantial worsening of fiscal parameters and debt.
The company warned, in a note published on the 8th evening, that the nation’s outlook could be lowered from stable to negative if there was a greater deterioration in the affordability of debt service costs compared to peers.
After the ballot on Sunday 7 July, there is no clear majority to define a new executive. French finances (and bond investors) have therefore remained in limbo until greater certainty emerges about who will govern the country and how it will address its debt load.
On the one hand, the deadlocked French parliament has reassured the markets, as Deutsche Bank analysts have written, since it makes it difficult to implement any more radical policies, given that neither the far left nor the far right can implement their program based on these numbers.
However, in trading on Tuesday, July 9, the French Cac is in the red. Uncertainty about the future is starting to weigh on us, as well as alerting strategists about the stability of public finances.
Moody’s launches a debt alarm in France
The election results put France “in an unprecedented situation”, Moody’s analysts including Sarah Carlson wrote, describing the fiscal implications of the impasse as negative for credit. “A weakening of the commitment to fiscal consolidation would increase downward pressure on credit ”, she explained.
France’s high debt burden increases its exposure to higher borrowing costs and could lead to a faster-than-expected increase in interest payments on the nation’s bonds, Moody’s has warned. debt sustainability carries a strong weight in the company’s assessment of France’s credit profile.
While interest rates in Europe are starting to fall, with the region’s central bank poised to cut again later this year, France’s borrowing costs have risen since President Emmanuel Macron last month decided to call early elections.
French 10-year bond yields rose five basis points to 3.22% on Tuesday, July 9, bringing their risk premium over safer German assets to 64 basis points, up from around 50 basis points. before calling the vote.
A reversal of the financial reforms implemented since 2017 by Macron and his allies could further damage the country’s credit rating and could result in “materially negative medium-term implications for France’s growth potential and/or its fiscal trajectory”, Moody’s analysts wrote.
The question of who will form the Government and which parties will make up the majority will therefore be crucial. Not only in terms of stability but also in terms of content. It should be added that Macron’s defeat in the European elections was also driven by the population’s discontent with his policies and it is unlikely that the left’s Mélenchon promises will be completely watered down in a necessary compromise. Three points summarize his priorities: repeal of the 64-year retirement age, price freeze, increase in the minimum wage.
In April, Moody’s confirmed France with the Aa2 rating, the third highest, and with a stable outlook. This can all change with a growing distrust of public spending and France’s debt fight.
However, thinking of definitively putting aside the fight against socioeconomic inequalities, exacerbated in recent years, is equally misleading. Especially in countries like France, where civil revolt is not so unthinkable.
Original article published on Money.it Italy 2024-07-09 15:20:29. Original title: Cosa rischia la Francia secondo Moody’s
