An unexpected piece of good news: Moody's has left France's sovereign debt rating untouched. Although markets had widely expected a downgrade, the New York-based agency on Friday evening maintained its assessment at Aa3 with a negative outlook.
France's ten-year borrowing rate (OAT) has soared this week, while the country is under strain after the riots of 17 October, which have added to investor unease. Moody's nevertheless justified its stance in a statement, explaining that "the Aa3 rating is based on the assumption that a 2027 budget reducing the deficit will be adopted, while funding costs and social tensions will moderate somewhat over the coming months".
As soon as the announcement was made, the government rushed to hail the decision. Economy Minister Roland Lescure was the first to react. He sees in it "recognition of the strength of our economy and the credibility of the budget" presented by the government. In his view, the goal of adopting by the end of the year a "responsible" budget that brings the deficit down to 5% is "non-negotiable".
In a more defensive tone, Prime Minister Sébastien Lecornu welcomed on X the fact that Moody's decision "confounds the doom-laden forecasts of many 'experts'" (his quotation marks) "and of those who speculate on French debt".
According to the head of government, the ongoing budget debate in the National Assembly "shows our creditors that there is a way forward".
He also highlighted a measure which, in his view, reflects the seriousness of current economic policy: "With the release of 10 million barrels of diesel we will have an impact on pump prices from 1 November, without playing fast and loose with the public finances".
"A welcome surprise"
A tougher stance from Moody's had nonetheless appeared inevitable. Speaking to Euronews a few hours before the verdict, Théophile Legrand, rates strategist at Natixis, even saw it as the "central" scenario. He stressed, however, that a downgrade would have been "largely" anticipated by the markets and that its announcement might therefore "not on its own trigger a pronounced reaction".
The decision ultimately taken is "a welcome short-term surprise for the government and the markets", notes the Natixis expert, following the announcement, from the corporate and investment banking arm of the BPCE group.
This relative leniency should not, however, be interpreted as a vote of confidence in the trajectory of the public finances, he warns. Moody's "indeed maintains a negative outlook, which means that the risk of a downgrade remains fully present".
The 24 October protests, "a test for the government"
The second act of the protests, scheduled for this Saturday, will be closely watched by investors. "The mobilisation expected this weekend will be a test for the government, particularly its ability to manage the situation" after the unrest on 17 October, says Théophile Legrand.
And even if the chaos seen last week is avoided, it would be more of a respite than a real relief. "The most worrying signal is the persistence of a climate of political uncertainty, likely to maintain pressure on French bonds", the economist points out.
"The excesses observed during the protests have certainly poured fuel on the fire", agrees Jérémie Peloso, chief Europe strategist at BCA Research. "However, it is above all the political deadlock, the glaring lack of budgetary ambition, both from the current government and from the various presidential candidates, and the deterioration of the public finances that are igniting the bond market," he laments in a comment to Euronews.
"French government debt has become a real pariah"
It had not happened since 2002. This Wednesday, France's 10-year borrowing rate broke through the 5.1% mark, compared with 3.2% before the start of the war between the United States and Iran, a level that was already regarded as high.
"This bond rout is obviously having negative consequences for the French economy", recalls Jérémie Peloso, who speaks of repercussions "particularly painful" for property, as access to credit is becoming ever more difficult.
"The market for French government debt has become a genuine pariah", argues the economist. "The reason is simple and has been known to all for years: French public finances are on an unsustainable path." Added to this, he continues, are the return of inflation against the backdrop of war in the Middle East, "anaemic" French growth and expectations of increases in the ECB's key interest rates.
Jérémie Peloso does not rule out that, in the short term and given the scale of the rise in yields in recent days, there could be "an opportunistic return of buyers to OATs, in a 'buy the dip' logic." In his view, this movement could be supported by the losses recorded on equity markets, "likely to trigger switches into bonds, traditionally seen as safe-haven assets".
This week, several French shares stumbled on the stock market. Carrefour's share price fell by more than 13%, after the group put the cost of the 17 October looting at between 80 and 200 million euros. In the luxury sector, Kering plunged 16% and Hermès 7%, against a backdrop of weaker quarterly results and shops trashed on the fringes of the protests, an additional vulnerability that is worrying investors.
Even so, investors turning to bonds "must not lose sight of the fact that French debt remains a genuine time bomb", insists Jérémie Peloso. "All the more so as an explosive presidential election is looming in less than six months," he adds.
"Ultimately, the most worrying issue remains the glaring lack of political will to tackle budgetary imbalances seriously", the expert says, stressing that "none of the major parties" seems ready to accept the political cost of drastic savings.
"As long as this reality does not change, investors will find it very hard to regain confidence in French debt."
"A crisis of confidence specific to France"
For Jérôme Mathis, economics professor at Paris-Dauphine University and author of the blog "Finance at the heart of our lives" (source in French), the most worrying signal is not the absolute level of interest rates but the growing spread with Germany.
"The recent underperformance of French bonds compared with German Bunds primarily reflects a crisis of confidence specific to France", he believes.
"The United States is also borrowing at rates close to 5%, which shows that high rates are not in themselves an anomaly. By contrast, when Germany remains close to 3.4% while France exceeds 5.1%, it means investors are demanding a risk premium that is specifically French."
According to the expert, for a long time French OATs were seen as almost equivalent to German Bunds. "That assumption no longer holds today. It is the clearest sign of a loss of budgetary and political credibility, and probably the most serious warning sent to France since the European sovereign debt crisis," he says.
With secondary school pupils and yellow vest protesters mobilising, investors now fear that "any serious attempt to restore the public finances will run into strong social and political opposition," Jérôme Mathis notes.
The budget battle in Parliament is growing fiercer by the day. On Friday, Public Accounts and Civil Service Minister David Amiel railed against what he called the "fourth dimension" in the National Assembly.
"Billions are raining down and savings are mechanically wiped out to applause", he complained, "even as interest rates soar."
The minister particularly deplored the fact that the social security deficit has "worsened by more than 5 billion" since the start of the examination of the bill, singling out in particular the National Rally.
Jérôme Mathis recalls that markets have already shown their sensitivity to "political scenarios liable to call into question the state's financial commitments."
During the 2022 presidential campaign, Jean-Luc Mélenchon's rise in the polls coincided, he says, with "a surge in questions about the future of French debt", linked to his plan to cancel part of it.
"And we now find the same combination": the prospect of a second round pitting Marine Le Pen against Jean-Luc Mélenchon and the continued presence of the LFI candidate's proposal to cancel the share of public debt held by the European Central Bank, or to turn it into perpetual, zero-interest debt.