French government bonds under pressure after Moody's downgrade!
French debt is again troubling investors, according to a widening interest rate spread between France's 10-year bond and eurozone benchmark Germany. France's borrowing costs topped 3.05% on Monday morning as trading resumed for the first time after one of the biggest credit rating agencies Moody's downgraded the country in a surprise move on Saturday.
France's new long-term issuer rating became Aa3, down from the previous Aa2, and the agency changed the country's outlook from negative to stable. This category matches the category that France is already given by the other two main rating agencies.
Moody's decided to downgrade France's debt because "the country's public finances will weaken significantly over the coming years" as "political fragmentation is more likely to prevent meaningful fiscal consolidation," the agency said in their statement.
On Friday, French President Emmanuel Macron named the country's fourth prime minister this year. Centrist François Bayrou follows Michel Barnier in the post, who resigned after his belt-tightening budget earned him and his government a successful no-confidence vote by the National Assembly more than a week ago.
The newly formed French government has an urgent task to ensure that the country has a valid budget for next year. "We expect the newly appointed government to push through a special law guaranteeing the continuity of public administration in 2025," said Moody's statement.
The outgoing government had the difficult task of economic belt-tightening, as France faces a deficit expected to exceed 6% of GDP in 2024 and a rising debt, a record €3.228 trillion, reaching 112% of GDP, well. above the 60% limit set by EU rules.
French Economy Minister Antoine Armand has reacted to the decision on X, saying that "Moody's has announced the change in France's rating to Aa3, highlighting the recent parliamentary developments and the current uncertainty arising from them regarding the improvement of our finances public. Note that The appointment of Prime Minister François Bayrou and the reaffirmed desire to reduce the deficit provide a clear answer.
The huge task of putting the debt and deficit on a sustainable path awaits the next government. According to the credit rating agency: "Looking ahead, there is now a very low probability that the next government will sustainably reduce the size of the fiscal deficit beyond next year." As a result, Moody's expects France's public finances to be weaker than previously expected for another three years.
The gloomy outlook put additional pressure on French government bonds on Monday morning, pushing the cost of 10-year borrowing beyond 3%, making it increasingly expensive for the country to finance its debt. The spread between Germany's 10-year bonds and the Eurozone's benchmark France widened to more than 80 basis points.
Rising 10-year bond yields left France's debt servicing costs higher (and seen riskier by investors) than those of Portugal, Slovenia or Croatia in early afternoon trade on the moon.
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