Moody's keeps France at Aa3 as unrest weighs on public finances

what happened

Moody's kept France's sovereign rating at Aa3 after a periodic review, easing pressure on a government struggling to contain social unrest and strengthen strained public finances. The negative outlook, in place since last October, stays. The agency tied the rating to the 2027 budget, which is meant to put the deficit on a path to recovery.

Bond markets had been pricing in a downgrade. France's 10-year yield reached 5.14%, the highest since July 2002, and the risk premium over German Bunds hit a 15-year peak on Thursday. The government still needs parliament to pass the budget, and opposition parties could reject it and topple the government in a no-confidence vote.

Moody's said the government's ability to overcome fragmentation in parliament will be the key factor for its next move. The presidential election on April 18 and May 2 next year, where polls suggest the far right could win, adds further uncertainty.

why it matters

For markets, the bigger risk lies after the election. If Moody's, S&P and Fitch all cut France to BBB, investors with rating limits could be forced to sell. Until then, the spread between French and German debt is likely to keep reacting to budget news and street protests.

market impact

French government debt and the OAT-Bund spread: the held rating eases pressure, but budget risks remain high

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