French Prime Minister-designate François Bayrou during a handover ceremony at the Hotel Matignon in Paris, France, on Friday, December 13, 2024.
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Within hours of taking office, France’s new Prime Minister François Bayrou faced his first headache: Credit rating agency Moody’s downgraded the country’s credit rating.
The agency announced on Saturday that Downgrade France’s rating The outlook was revised to “Aa3” from “Aa2”, citing concerns about “political fragmentation.”
Paris is in the midst of a political whirlwind, with disagreements over tax and spending plans leading to the collapse of the previous government after just three months in power.
Moody’s said the disagreements would hurt efforts to resolve France’s budget deficit and debt, adding that the country’s public finances would be “significantly weakened in the coming years.”
“This is because political fragmentation is more likely to hinder meaningful fiscal consolidation… Looking ahead, the likelihood that the next government will sustainably reduce the size of the fiscal deficit after next year is very low,” the ratings agency said in a statement.
Traders react negatively to downgrade, France CAC 40 It fell 0.7% in early trading on Monday. Meanwhile, the country’s benchmark 10-year government bond yield is 3.03%, just slightly lower than Greece’s 3.09%.
Late last month, the yield spread on 10-year French and Greek government bonds fell to zero as investors demanded the same interest rate for holding French bonds as historically troubled Greek bonds – a sign of growing concern about the former’s political turmoil level of concern.
Uncertainty has gripped France since the summer, when parliamentary elections were indecisive and both left- and right-wing political blocs fared well. French President Emmanuel Macron nonetheless appointed conservative Michel Barnier as prime minister, sparking consternation among opposition parties on both sides of the political spectrum.
Barnier’s government proved short-lived, lasting just three months after French lawmakers rejected his government’s 2025 budget plan, which included billions of euros worth of tax increases and public spending cuts. It was overturned in a vote of no confidence in early December.
Under pressure to quickly appoint a successor, Macron on Friday appointed his centrist ally Berou as prime minister.
Bellou, 73, leader of the Democratic Movement party and a political veteran from the center, has advocated for France to address its growing debt problem, expected to be around 112% of gross domestic product by 2024. and a growing budget deficit.
What are Bailu’s chances?
Analysts say Bayrou’s longstanding presence in French politics could help renewed attempts to get far-left and far-right lawmakers to agree on a 2025 budget.
Meanwhile, National Assembly deputies are expected to agree to extend the 2024 budget to 2025 to prevent a government shutdown on January 1.
Still, a final deal for next year’s budget is unclear, leaving the new government’s position as fragile as the last.
“The path to securing the 2025 budget is unclear,” JPMorgan economist Raphael Brun-Agyer said in a note on Friday.
“Adopting the opposition’s demands may come with high fiscal costs, so the extent of fiscal consolidation next year may be limited,” he said in emailed comments.
There is speculation that Bellou will seek the support of parties within the left-wing New Popular Front coalition to prevent another no-confidence motion and pave the way for an agreement on the 2025 budget.
“If Bellou is able to ‘buy’ 66 Socialist delegates (which is far from certain), he will split the left-wing coalition of the New Popular Front, which last week voted to oust Barnier with Marine Le Pen’s National Rally party, Mujtaba Rahman, managing director of Europe at Eurasia Group, said in an email.
“With the support of 20 or so independents, he may hope to avoid a censure motion or even pass the budget in the normal way once the revised 2025 tax and spending plan is tabled in the new year. There is no threat of another censure vote in Parliament. The combined power of the far right and far left will be neutralized or significantly weakened,” Rahman said.
Eurasia Group said its base case is that Beru has a narrow window of opportunity to prepare its 2025 budget in the first few months of 2025 (60% chance). Send the consultancy to the left.
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