Moody’s has downgraded the ratings of seven major French banks amid spiraling national debt and a toxic political environment, days after it cut its rating for the country as a whole.
The ratings agency downgraded a host of French banks, including the country’s two largest banks BNP Paribas and Credit Agricole, on Tuesday, while upgrading their outlook from negative to stable.
Moody’s said “there is increasing uncertainty about the next government's ability to reduce the deficit beyond next year” as it reduced its credit ratings for banks with significant interest in French finances.
On Sunday, Moody’s downgraded France’s debt rating from Aa2 to Aa3, reflecting growing pessimism that France will be able to address its €3.2 trillion national debt and a rising deficit under a hobbled political system.
The move came just days after French President Emmanuel Macron appointed François Bayrou as the country’s new prime minister following the government’s collapse on Dec. 4.
Former PM Michel Barnier’s government collapsed after his budget plan to reduce France’s national deficit to 5% in 2025 received stiff opposition from Marine Le Pen’s far-right national rally and the left-wing alliance. There is little expectation that a new coalition will be able to break this deadlock.
“The decision to downgrade France's ratings to Aa3 reflects our view that the country's public finances will be substantially weakened over the coming years,” said Moody’s in a statement, adding that political fragmentation was more likely to impede meaningful fiscal consolidation.
Moody’s warned of a negative feedback loop in the country of “higher deficits, a higher debt load and higher financing costs, against the backdrop of significant annual borrowing needs.”
France’s national debt reached a record high of €3.2 trillion in the second quarter of 2024, with its expected budget deficit being lifted to 6.1%, leaving the country in a precarious financial position.
“At the end of November, French borrowing costs had reached an unprecedented high, close to the levels seen at the height of the sovereign debt crisis and above those of Greece for the first time,” wrote Camilla Locatelli in a blog post for LSE. “This reflects a loss of credibility for the French public finances in the eyes of international creditors and will make it even more difficult to address the current crisis.”
Foreign investors hold around half of France’s national debt, much higher than figures in Spain, the U.S., and Italy. That’s important because foreign investors can be more volatile than domestic ones, and more likely to lose confidence based on political upheaval.
French banks, meanwhile, hold a relatively small amount of French debt, meaning a lower risk of contagion if foreign investors take flight from French debt. France could also encourage these banks to buy up more debt.
