Moody's keeps France at Aa3 with negative outlook as bond yields top 5%

Rating held, outlook still negative

Moody's kept France's long-term sovereign rating at Aa3 on Friday, 23 October, and left its negative outlook in place. Many economists had expected a downgrade, so the decision surprised much of the market. In its statement the agency said the move was not 'a credit action'. Instead, the rating rests on the assumption that a 2027 budget cutting the public deficit will be adopted and that financing costs and social tensions will ease in the coming months. Moody's also said the decision says nothing about how likely a rating change is in the near future.

Bond market strain

France's 10-year government bond yield crossed 5% on Wednesday, 21 October, for the first time since 2002. The spread over German bonds stayed above 170 basis points on Friday, compared with about 70 points at the start of the year. The premium investors demand on French debt has reached a 15-year high. Yields on French 10-year bonds now sit above those of Italy and Spain, both rated lower, and Paris borrows at a higher cost than some French companies.

Budget and political pressure

Prime Minister Sébastien Lecornu welcomed the decision on X, saying it defied the gloomy forecasts of those betting against French debt. Speaking on franceinfo on Saturday, 24 October, Economy Minister Roland Lescure called the rating a recognition of the economy's strength and a warning to those who want to drift away from the budget plan. He had said at the start of the week of 19 October that he was convinced France would have a budget in early 2027, and he gave his reason.

We have no choice, and we have the constitutional instruments to get it adopted.

Those instruments include the 49.3 procedure or ordinances. The deficit is expected to exceed 5.4% of GDP, and public debt stands at 119% of GDP. Moody's expects debt to exceed 120% of GDP in 2027 and says a significant, sustained fiscal effort will be needed beyond the presidential elections of April and May 2027. Widespread social protests have broken out, and Moody's pointed to the deteriorating social climate and the risk of turbulence and violence. Fears of new street violence were reported on Saturday.

Investor and downgrade risk

Corrado Varisco, head of research at Geneva-based fund manager Bridport, said a further downgrade could force sales by investors whose mandates require a minimum rating. Fitch and S&P already rate France A+, which leaves Moody's Aa3 as the last double-A rating the country holds. The negative outlook remains in place, and the 2027 budget has yet to pass.