No Downgrade! Moody's Didn't "Add Fuel to the Fire", France "Dodged a Bullet"

France has temporarily avoided a downgrade in a highly anticipated credit rating review.

On Friday, October 23, Moody's announced that it would maintain France's Aa3 rating, providing short-term breathing room for the eurozone's second-largest economy, which is mired in debt pressure, political deadlock, and social unrest.

In its statement, Moody's noted that France's diversified economic structure and robust public institutions support the current rating, but maintained its outlook as negative, reasoning that ongoing political instability will continue to constrain fiscal consolidation efforts.

Moody's stated, “The maintenance of the Aa3 rating is based on the assumption that France will ultimately adopt a deficit-reduction budget plan, and it is expected that ‘financing costs and social tensions will ease somewhat in the coming months.’”

Markets had already largely priced in downgrade expectations, with the yield spread between France and Germany’s 10-year government bonds rising to 178 basis points—its highest since the eurozone debt crisis—while France’s 10-year benchmark yield climbed to 5.14%, the highest since July 2002.

Moody’s decision to maintain the rating may help temporarily ease further increases in borrowing costs, but analysts warn that, given the underlying fiscal and political risks remain unresolved, market pressures are unlikely to vanish fundamentally.

This rating maintenance keeps Moody's rating for France one notch above that of S&P and Fitch.

S&P and Fitch both downgraded France’s rating to A+ in 2025, citing deteriorating public finances and political instability.

Moody’s itself had downgraded France from Aa2 to Aa3 at the end of 2024, and has since placed it under negative outlook. In its latest statement, Moody’s admitted:

Slowing growth and a widening deficit have pushed France’s debt burden above previously anticipated levels, and the pace of rising bond yields has also exceeded expectations.

Meanwhile, large-scale social protest movements were explicitly mentioned, with Moody’s considering these a constraint on fiscal consolidation.

Notably, Moody’s specifically stated that this conclusion does not constitute a formal credit rating action nor indicate whether a rating action will be taken in the near future.

France’s current fiscal situation is particularly notable within the eurozone.

This year’s budget deficit is expected to reach about 5.4% of GDP, far above the EU’s 3% limit and the eurozone average, with public debt close to 120% of GDP. The International Monetary Fund predicts France’s economic growth this year at just 0.4%, significantly below the eurozone average of 1.1%.

The structure of debt financing also amplifies market vulnerability. According to EU data, about 55% of France’s government bonds were held by overseas investors last year, much higher than the U.S. (31%) and Japan (13%). This means any wavering in international investor confidence could quickly transmit into higher borrowing costs.

Meanwhile, social pressures are intensifying. Last weekend, large demonstrations broke out in multiple French cities, with over 500,000 people protesting the high cost of living; in some areas, this devolved into unrest, with public buildings attacked and shops looted. Authorities are struggling to prevent a repeat of such scenes this weekend.

Prime Minister Sébastien Lecornu has proposed the 2027 fiscal bill, aiming to drastically cut spending and increase tax revenues, targeting a deficit capped at 5% of GDP. However, with the government lacking a parliamentary majority, the bill’s outlook is highly uncertain.

On Friday, the French National Assembly rejected the “revenue” section of the 2027 social security budget bill, submitting the original draft to the Senate for review, while the lower house will continue debating the main budget bill next week. Meanwhile, opposition parties, unwilling to compromise before the elections, have removed some proposed cuts and added new spending items.

Moody’s notes, “The 2027 budget process coincides with France’s largest wave of social protests in years,” but its baseline assumption is that the deficit-cutting budget “will ultimately be adopted, perhaps by administrative decree.”

Finance Minister Roland Lescure responded that Moody’s decision to maintain the rating “recognizes the soundness of our economy and the credibility of the government’s budget plan.”

Moody’s explicitly states that France must continue to advance “large and sustained fiscal consolidation efforts” after the presidential elections in April–May 2027 to put public finances on a firmer footing and to stabilize debt, which by then will exceed 120% of GDP.

Political uncertainty remains a core risk closely watched by the market.

Since the snap elections in 2024 resulted in a hung parliament, successive governments have struggled to pass budget legislation and fiscal reform. The fiscal policy stances of far-right leader Marine Le Pen and left-wing leader Jean-Luc Melenchon, both leading in current polls, have raised market concerns about future policy direction.

Mike Bell, head of market strategy at RBC BlueBay Asset Management, warns that if Moody’s, S&P, and Fitch all downgrade France to BBB—a single notch above junk—after the presidential election, institutions with rating thresholds may be forced to sell off French bonds, at which point the situation could “really start to get ugly.”

The next key date is S&P’s scheduled review of France’s rating on November 27. Additionally, Scope Ratings issued a downgrade warning this month, and Morningstar DBRS also revised its outlook to negative, meaning pressure on France’s ratings remains in the near term.