Moody’s Puts France on Watch for a Credit Downgrade. Why It’s Become a ‘Hot Mess.’

(MARTIN LELIEVRE/AFP via Getty Images)

France has its issues, and credit-rating firm Moody’s is finally acknowledging them.

Moody’s changed its outlook on French government bonds to Negative from Stable. The firm rates France’s bonds Aa3, the equivalent of AA-, and a downgrade would bring them to A1. The action follows S&P’s decision to downgrade French bonds to A+ from AA- on Oct. 17. The highest rating that S&P gives is AAA, while Moody’s highest rating is Aaa.

Moody’s was the last ratings agency to make a move in response to France’s challenges. Fitch Ratings in September downgraded France to A+ from AA-, with a stable outlook, in part citing the fragmentation in control of France’s government and political deadlock.

Similarly, in putting France on watch for a credit downgrade, Moody’s cited the nation’s political instability, which “risks hampering the government’s ability to address key policy challenges such as an elevated fiscal deficit, rising debt burden, and durable increase in borrowing costs,” according to the release.

France had been trying to reform its pension system, while also getting its deficit under 5% of gross domestic product, but has failed to agree on a budget. Prime Minister Sébastien Lecornu resigned his position earlier this month after just one month on the job. He had followed François Bayrou, who resigned after nine months over anger at his plan to cut the budget by $44 billion euros. “To call France a ‘hot mess’ would be an understatement extraordinaire,” Yardeni Research founder Ed Yardeni wrote in a note on Oct. 22.

The Moody’s decision “demonstrates the absolute necessity of building a collective path toward a budgetary compromise,” said Roland Lescure, France’s finance minister in a social media post.

The inability of France to effectively govern has caused 10-year bond yields to rise from 3.186% at the end of 2024 to 3.436%. France’s yields are now higher than those of Greece, Italy, Portugal, and Spain.

The chaos, however, hasn’t dented enthusiasm for French stocks. The iShares MSCI France exchange-traded fund has gained 26%, easily outpacing the S&P 500’s 15% rise.

Write to Ben Levisohn at ben.levisohn@barrons.com