France keeps credit rating on unrealistic austerity premise as bond yields top 5%

Moody's on Oct. 23 kept France's sovereign credit rating at Aa3. The rating outlook remains negative, leaving open the possibility of a downgrade. Global bond markets view the decision not as recognition of France's fiscal soundness but as a temporary reprieve granted on the back of political assumptions that are highly unlikely to materialize.

Moody's cited two conditions for maintaining the rating. The French government's 2027 fiscal austerity budget must be passed intact by parliament, and large-scale social unrest must subside within the coming months. But analysts say these conditions are unrealistic given the extreme political standoff in Paris and the chaos in the streets.

Unlike the rating agency's reprieve, the market's assessment is harsh. Global bond markets had already been treating France as a distressed sovereign well below its nominal rating before Moody's announcement. The yield on France's 10-year government bond broke above 5%, surging to its highest level since July 2002, a 24-year high.

Comparisons with other countries also flash warning signs. The spread between French and German 10-year government bond yields — the benchmark for eurozone fiscal soundness — has widened to its broadest in 15 years. In an anomaly, France's borrowing costs are even higher than Italy's, whose credit rating is more than two notches lower. Large Japanese institutional investors, which hold more than 10% of outstanding French government bonds and have been major buyers, are also reducing their long-term bond holdings and accelerating their exit.

Rival rating agencies already align with market rates. S&P Global Ratings and Fitch earlier downgraded France's sovereign rating to A+, one notch below Moody's. Among the three major rating agencies, Moody's alone maintains an AA rating, but market rates already reflect a risk premium consistent with an A rating or lower.

France's public finances have deteriorated severely. Moody's projects that France's national debt will exceed 120% of gross domestic product (GDP) by 2027. That is double the eurozone fiscal rule ceiling of 60%. Slowing growth and a widening structural fiscal deficit have pushed debt growth beyond control. The government has set a target of capping the fiscal deficit at 5% of GDP, but no concrete path for spending cuts is visible.

The parliamentary landscape needed to pass the budget is in its worst-ever gridlock. The centrist cabinet led by French Prime Minister Sébastien Lecornu falls far short of a parliamentary majority. Parliament is split between the far-right National Rally and the left-wing La France Insoumise, among other polarizing forces. All of these factions openly oppose welfare reductions and public spending cuts, making passage of the original budget bill virtually impossible.

The French government could invoke a special constitutional provision to bypass a parliamentary vote and force the budget through. But that carries a high risk of triggering an immediate no-confidence vote and the collapse of the government. Political paralysis has been so severe that the prime minister has changed five times in the past two years, and with the 2027 presidential election approaching, populist campaign pledges have further eroded political will for austerity. On Oct. 17, nationwide protests demanding price stability and relief from cost-of-living pressures turned violent, with thousands arrested, pushing public resistance to austerity past a breaking point.

Ultimately, Moody's decision amounts to an ultimatum that offers an opportunity while setting an impossible task. The key question is whether parliament will descend into dysfunction or a no-confidence crisis will recur during the 70-day statutory budget approval window. S&P's scheduled credit rating review on Nov. 27 is another critical indicator. If France fails to demonstrate meaningful spending cuts, even its remaining Aa3 rating could be downgraded, exposing it to a genuine credit crunch with soaring borrowing costs.

※ This article is an AI translation of the Korean original published by Korea Credit News; it was checked by automated quality guards and published by the English edition desk.