France’s credit outlook has been revised to ‘negative’ by Moody’s, a leading credit ratings agency, due to the country’s political fragmentation, which poses a significant risk to its ability to address key policy challenges, including its deficit and rising debt. The agency cited the increased risk that the fragmentation of the French political landscape will continue to harm the functioning of legislative institutions, thereby hindering efforts to reduce the deficit, debt, and borrowing costs.

The French government, led by! President Emmanuel Macron, has struggled to implement policies due to a lack of parliamentary majority for two years, resulting in a divided country among three rival blocs. This has led to a high turnover of prime ministers, with the current leader, Sebastien Lecornu, narrowly surviving two no-confidence votes in October. The government has also failed to pass the 2026 budget, which faces strong opposition over spending cuts and tax hikes.

Moody’s decision reflects the potential consequences of political instability on France’s economic policies, including the risk of a sustained rollback of certain previously adopted structural reforms, such as the pension reform. The agency warned that delaying the implementation of these reforms could exacerbate fiscal challenges and negatively impact potential growth by reducing labor supply.

Despite the revised outlook, Moody’s maintained France’s Aa3 credit rating, citing the country’s strong household and corporate finances and a robust banking sector. However, analysts warned that the negative outlook could lead to a downgrade without swift improvements. This is significant, as France’s ten-year yield stood at 3.4% on Friday, nearly matching Italy’s, the EU’s weakest performer.

The downgrade by Moody’s follows similar actions by Fitch and S&P Global, which recently downgraded France to single-A, citing political paralysis, weak investment, and fiscal doubts. Experts warned that these downgrades could trigger forced bond sales by investors limited to high-grade debt. In response to the decision, French Finance Minister Roland Lescure emphasized the need for a collective path toward budgetary compromise, highlighting the importance of addressing the country’s fiscal challenges.

The revised outlook by Moody’s serves as a reminder of the need for France to address its political fragmentation and implement effective policies to manage its deficit and debt. With the country’s economic stability at risk, it remains to be seen how the government will respond to the challenges ahead and work towards achieving a more stable fiscal environment.