Moody's to Review France's Credit Rating Amid Concerns

Moody's is set to review France's sovereign credit rating on Friday, an event closely monitored by bond investors. France currently holds an Aa2 rating from Moody’s, but there is market speculation of a potential downgrade due to concerns about the country's fiscal health. Decisions by rating agencies like Moody’s are crucial as they affect a country's ability to borrow through bond markets. A downgrade could increase pressure on the French government and impact demand for French bonds among foreign investors, who are the main buyers of the country's debt.

France has one of Europe's largest bond markets, with a debt stock of approximately 2.6 trillion euros ($2.8 trillion). The yield spread between French and German 10-year bonds reflects the additional return investors demand for holding French debt compared to what is perceived as safer German bonds, recently recorded at 74 basis points (bp). This spread was slightly narrower around 77 bp when Prime Minister Michel Barnier presented the 2025 budget plan and reached a multi-year peak above 85 bp over the summer.

Pricing of French credit default swaps (CDS), which provide insurance against default, indicates that investors assess France's credit risk to be closer to that of single A- or even triple BBB-rated entities, despite its current AA rating. According to S&P Global Markets Intelligence, France’s five-year CDS are trading at 33 bp, higher than Spain’s 31 bp, which is rated two notches below France by Moody's. Prior to this summer’s elections, French CDS traded around 24 bp.

In related developments, Moody’s previously commented in July that election outcomes in France could negatively impact the country's credit rating. Additionally, Fitch revised France’s outlook from “stable” to “negative” in mid-October while maintaining its AA- rating. France's rating was also downgraded to AA- by S&P in May.

Yields on France’s 10-year bonds were most recently recorded at 3.05%, down from around 3.2% at the beginning of June. Looking ahead, market attention is focused on the National Assembly's decision regarding the 2025 budget, which proposes 60 billion euros in spending cuts and tax hikes. Prime Minister Barnier's minority government faces the risk of a no-confidence vote as it seeks parliamentary approval for the budget plan.