Moody’s Downgrades France’s Outlook Over Fiscal Concerns

Moody's Downgrades France's Outlook Over Fiscal Concerns
Moody's Downgrades France's Outlook Over Fiscal Concerns

France’s Economic Concerns Deepen as Moody’s Downgrades Outlook

In a move that has raised concerns over France’s financial stability, ratings agency Moody’s downgraded the country’s outlook from "stable" to "negative" on Friday. This change in outlook signals a potential credit rating cut due to the country’s struggling finances. Despite affirming France’s credit rating at Aa2, Moody’s expressed concerns over the government’s ability to implement measures that would prevent sustained budget deficits and a deterioration in debt affordability.

Moody’s cited the country’s fiscal deterioration as a primary reason for the downgrade, stating that it was "beyond our expectations and stands in contrast to governments in similarly rated countries that are tending to consolidate their public finances." The agency noted that France’s large, wealthy, and diversified economy was a supporting factor for its credit rating, but this was not enough to offset the current fiscal challenges.

In response to the downgrade, France’s new finance minister, Antoine Armand, acknowledged the decision but maintained that the country has the capacity to implement "far-reaching reforms." Armand emphasized that some reforms have already yielded results and that France possesses economic strength, pledging to restore its public finances. However, he also conceded that France must take "credible" steps to address its high deficit.

The French government faces significant challenges in managing its finances, with a public sector deficit expected to reach 6.1% of gross domestic product in 2024. In an effort to address this, new Prime Minister Michel Barnier has unveiled a deficit-cutting budget, aiming to bring the deficit below 5% of GDP next year. The government hopes to reduce the deficit to below 3% by 2029, in line with the EU’s deficit ceiling.

France’s debt is expected to rise to nearly 115% of GDP next year, compared to the EU debt target of 60%. In absolute terms, France’s debt stands at over €3.2 trillion, having risen by about €1 trillion since President Emmanuel Macron took office in 2017. Earlier this month, Fitch Ratings also affirmed France’s rating at AA- but revised its outlook from "stable" to "negative", pointing to heightened fiscal policy risks.

Budget Minister Laurent Saint-Martin noted that the strength of the French economy continues to be recognized, but emphasized the need for the country to pursue a structural reform agenda. As France navigates these economic challenges, it remains to be seen whether the government can implement the necessary reforms to restore its public finances and address its high deficit.

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