PARIS ― Political instability is likely to hurt French efforts to get the country’s public finances in order, a top executive at Moody’s said ahead of a hotly anticipated credit rating decision on Friday.
 
“We do believe that fiscal consolidation is a goal, but we anticipate that meeting that goal is going to be very challenging,” Moody’s Chief Credit Officer Atsi Sheth told POLITICO in an interview in Paris. “The last couple of months have just been evidence of that challenge.”

Moody’s is the last of the three big  agencies that still considers France a AA-rated credit, following downgrades to the single-A category from Standard & Poor’s and Fitch in recent weeks.

Sheth acknowledged Prime Minister Sébastien Lecornu’s public commitment to narrowing a budget deficit that is set to hit 5.4 percent of gross domestic product this year, but said the “process is fraught with challenges, challenges that are rising given the political environment.”

France has been in the throes of heightened political instability for the last two years, cycling through no fewer than five prime ministers. Lecornu’s predecessor, François Bayrou, was toppled in September over his plans to squeeze the 2026 budget by €43.8 billion, and Lecornu himself was forced to resign earlier this month just 14 hours after naming his government. President Emmanuel Macron reappointed him to the job days later.  

Lecornu has put forward a budget for next year that includes €30 billion worth of savings and could narrow the deficit to 4.7 percent of GDP. But getting it approved will be a fraught process. To help ensure the survival of his minority government, the 39-year-old has promised not to use a constitutional backdoor that would have allowed him to bypass a vote in parliament to pass the budget. That leaves his draft vulnerable to dilution during the parliamentary process.

Sheth said that Lecornu’s pledge to let the parliamentary debate happen is the type of move that is taken into account when deciding a credit rating. But she stressed that the most important thing was for France to signal it’s serious about cutting runaway public spending.

More than anything, that means reining in the cost of France’s generous pension system, by measures such as the unpopular 2023 law that raised the retirement age for most workers to 64. Lecornu has pledged to pause that measure, a concession to the left to ensure his government’s survival. The freeze will cost state finances €400 million in 2026 and €1.8 billion in 2027, which will have to be found elsewhere, Lecornu said. 

When Moody’s downgraded France last year, it said that backtracking on that reform could negatively impact France’s credit.  

“The suspension does mean that the fiscal risk that would have been addressed by it remains,” Sheth said. 

Moody’s downgraded France to Aa3 from Aa2 in December, citing the political uncertainty but left its outlook stable. Another downgrade would see France drop out of the prestigious group of countries rated double-A, such as the United Kingdom.

As such, a downgrade could see French bonds vanish from the portfolios of investors who are limited to holding assets with a minimum of one AA-rating. The risk of a downgrade is, however, somewhat mitigated by the fact that Moody’s latest judgment on the credit outlook was “stable” rather than “negative.”

“It is really up to us — the government and parliament— to convince observers, rating agencies and financial markets,” Finance Minister Roland Lescure said last week after S&P downgrade.