A respite after a week of crisis! France temporarily escapes Moody's downgrade

According to Zhitong Finance APP, France has avoided a downgrade by Moody's, providing a reprieve for the country currently grappling with soaring bond yields, political gridlock, and street protests. Moody's has maintained France’s rating—the eurozone's second-largest economy—at Aa3, which is seven notches above “junk” status and on par with the UK; the rating outlook remains negative.

Moody's stated: "Slower economic growth and an expanding fiscal deficit have led France’s debt burden to rise above our previous forecasts. Bond yields are rising faster than we anticipated, while widespread social protests have already erupted, potentially limiting efforts toward fiscal consolidation."

Moody’s decision to temporarily maintain France’s current rating means it remains one notch higher than the ratings from S&P Global Ratings and Fitch Ratings. Both S&P and Fitch downgraded France during a budget dispute in the autumn of 2025. Last month, France performed poorly in ratings reviews, with Scope Ratings downgrading France and Morningstar DBRS revising its outlook for France to negative. S&P has scheduled a rating update for France on November 27.

French Finance Minister Roland Lescure said in a statement on Friday: “This decision acknowledges the robustness of our economy and the credibility of the budget plan submitted by the government.”

This breathing space comes on the eve of yet another tense weekend in France. Currently, French authorities are striving to prevent a repeat of large-scale unrest, which previously caused serious destruction in multiple cities.

Meanwhile, France still cannot find a way to control its ever-expanding debt burden, making it the focal point of bond market anxiety in recent weeks. The increase in French government bond yields this month has outpaced those of any other developed economy and has risen to the highest level in 24 years.

France’s rising debt is driven by a growing fiscal deficit, which is expected to widen to 5.4% of economic output this year. Political deadlock, weak economic growth, and rising interest costs have derailed fiscal consolidation efforts.

France faces surging debt servicing costs

French Prime Minister Sébastien Lecornu has proposed a fiscal bill aimed at sharply curbing expenditures and increasing tax revenue to achieve a 5% fiscal deficit target next year. However, as he lacks a majority in the parliament, the future of this proposal remains uncertain.

On Friday, the French National Assembly rejected the “revenue” section of the 2027 social security budget, meaning the bill’s original version will be submitted to the Senate. Lower house lawmakers will restart discussions on the main budget bill next week.

Moody’s stated in a report on Friday: “The 2027 budget process coincides with one of the most extensive social protest movements France has experienced in years. Despite a challenging political and social environment, our baseline assumption is that a 2027 budget capable of reducing the fiscal deficit will eventually pass, possibly even by decree.”

The growing uncertainty has already pushed a closely watched bond market risk indicator to levels not seen since the eurozone debt crisis. The yield spread between France and Germany—the region’s safe-haven asset issuer—for 10-year government bonds reached 178 basis points on Thursday. Before the sell-off intensified in early September, this spread was just 85 basis points.

Historical Perspective—Lessons from the Euro Debt Crisis

During the last eurozone debt crisis, the financial crisis exposed Greece’s fiscal misreporting as well as real estate and banking risks in some countries; falling government bonds hurt banks, and government bailouts of banks further worsened public debt. Austerity and recession further eroded debt repayment capacity. Rescue mechanisms, Greek debt restructuring, and the European Central Bank’s 2012 commitment to defend the euro gradually contained the panic.

The term “PIIGS” refers to Portugal, Italy, Ireland, Greece, and Spain, which are five European countries derogatorily labeled by Wall Street as having low sovereign debt credit ratings.

However, this time, it is not the traditionally weaker “PIIGS” economies that could trigger a new euro debt crisis but rather France, the eurozone’s second-largest economy.

As the second-largest economy in Europe, the scale of France’s government bond market has far greater influence on the European and global economy than the “PIIGS” nations that triggered the eurozone crisis fourteen years ago. Increasingly, investment institutions worry that continued massive sell-offs of French bonds could have spillover effects, potentially sparking a new euro depreciation crisis and eurozone debt crisis impacting global financial markets.

Looking back at the last eurozone debt crisis—in 2009, Greece reported a large upward revision of its fiscal deficit, while post-financial crisis recession and the costs of bailing out banks further exposed member states’ fiscal fragilities. The pressure then spread to Ireland, Portugal, Spain, and Italy. Falling government bonds weakened banks’ assets and financing, while rescuing banks increased government burdens, creating a “sovereign-bank doom loop”; fiscal tightening further hindered growth. European rescue mechanisms were gradually established, and especially in 2012, then-ECB President Mario Draghi’s pledge to do “whatever it takes” to preserve the euro, alongside the ECB’s conditional Outright Monetary Transactions (OMT), gradually restored market confidence.

This round of bond market sell-offs and fiscal credit crisis in France has not yet reached the point of repeating a full-blown crisis—European banks now have stronger capital buffers, and the ECB has the Transmission Protection Instrument (TPI), although intervention requires assessment of fiscal and debt sustainability rather than being an unconditional backstop. True escalation signals for a French fiscal and sovereign debt crisis would include a wave of French government bond sell-offs and a budget deadlock evolving into a liquidity and financing crisis in the euro area via commercial banks’ sovereign bond portfolios, subsequently spreading to other member states.