Moody’s spares France a downgrade but keeps a negative outlook as unrest and bond yields weigh

Moody’s spared France a credit rating downgrade on Friday, easing pressure on a government struggling to contain social unrest^1,8. The agency left its rating on France at Aa3⁶. The decision defied expectations of a downgrade, but Moody’s left its outlook at negative⁷.

The reprieve came as a surprise for a country struggling with soaring bond yields, and it was a boost for Macron’s government². The rating was held steady amid political uncertainty and a rise in borrowing costs that have worsened France’s debt position, and the country was given a warning alongside the decision³.

The decision was accompanied by the assessment, quoted in coverage of the rating, that slower growth and a higher deficit have pushed France’s debt burden somewhat higher⁵.

Why it matters to investors

France’s debt turmoil has spilled beyond its borders. It helped turn US Treasury yields around¹⁰, and US Treasury yields rose as investors sought safety from the turmoil⁴. Before the decision, investors were weighing which sectors and asset classes are most exposed to prolonged upheaval, with the Moody’s review one of the events in view⁹.

The unrest is the backdrop to the rating. French cities have been shaken in recent weeks by vandalism and looting sparked by cost-of-living demonstrations, amid a broader crisis besieging the lame-duck centrist government that has spiked French bond yields¹¹. Demonstrations last week erupted into violence, including mass looting and cars being set alight, and resulted in more than 2,000 arrests¹². Macron has banned non-union protests in response¹¹.

A held rating with a negative outlook is a mixed verdict. It removes the immediate risk of a downgrade that markets had been bracing for, while signalling that the agency’s concerns about France’s debt remain^3,7.

What to watch

France is bracing for further protests planned for this weekend¹². A repeat of last week’s violence would test a government that Moody’s has given some breathing space but not a clean bill of health^1,3.

The negative outlook keeps a future downgrade possible⁷. Investors will watch French bond yields, whose rise has worsened the country’s debt position, and any further spillover into US Treasuries, which have moved with the French turmoil this week^3,4,10.

The government’s next steps on the budget and on public order are the other test. Coverage of the decision tied the rating to the government’s struggle to contain social unrest¹, and the assessment attached to it pointed to slower growth and a higher deficit⁵. Both will be measured against the protests planned this weekend¹².