A hung parliament could jeopardise the country's ability to reduce its debt burden, warns the ratings agency.
ADVERTISEMENTFrance's credit rating is sitting on a knife edge following Sunday's legislative elections, which have left a cloud of uncertainty over the nation's political future.
That's according to a note published late on Monday by Moody's credit rating agency, which raises concerns about France’s economic outlook.
"In light of the constraints that any future government faces, we are unlikely to see expenditure-based fiscal consolidation in 2025," said Moody's.
The agency added that its rating for France could be downgraded if the country's debt situation deteriorates.
A fragmented parliament will slow down progress
After a predicted victory for the far-right National Rally party (RN) in France's legislative elections, Sunday’s second round saw a surge of support for the left-wing coalition, the New Popular Front (NFP).
With 182 seats, the NFP emerged with the largest share of the votes. The Ensemble party of centrist President Emmanuel Macron, which secured 168 seats, came in second. The RN and allies, meanwhile, bagged 143 seats.
Given the failure of any party to secure an absolute majority, negotiations are underway to form a government.
It's possible that the leftist coalition could govern as a minority, but any attempts to pass legislation would still require support from other parties. Another option could be a centrist coalition. This, however, hinges on the willingness of moderate parties to work together.
The looming possibility of political gridlock will likely complicate France's ability to reduce its debt burden, a problem that was plaguing the country before President Macron called the snap election.
In 2023, France's public sector budget deficit widened to 5.5% of economic output, significantly overshooting the government's target of 4.9%.
In response, finance minister Bruno Le Maire was pushed into a cost-cutting crusade, seeking to balance the books after a period of tepid growth, high interest rates, and post-covid spending.
Le Maire, reacting to the success of the NFP, warned on Monday that fiscal progress could be jeopardised through higher public spending.
"The most immediate risk is a financial crisis and the economic decline of France," he wrote on X.
"Implementing the New Popular Front's programme would destroy the results of the policy we have pursued for the last seven years, which has given France jobs, attractiveness and factories."
Reversal of pension reforms and other economic policies
If France's debt burden increases, this means it will have to pay higher interest payments on bonds, which will be viewed as higher-risk.
ADVERTISEMENTBond yields were relatively subdued in the immediate aftermath of France's election announcement, although investors will be closely monitoring the political situation in the coming weeks.
Moody's warning comes after ratings agency S&P expressed similar concerns about France's economy on Monday.
"Our 'AA-/A-1+' sovereign credit ratings on France would come under pressure if economic growth is materially below our projections for a protracted period," S&P said in a note.
"Or if France cannot reduce its large budget deficit and if general government interest payments, as a share of government revenue, increase beyond our current expectations."
ADVERTISEMENTS&P had already downgraded France's rating at the end of May because of the country's deficit figures.
Moody's rating is currently more favourable, as the agency held France at Aa2 - its third-highest grade - in April.
Going forward, Moody's notably discouraged policy makers from reversing President Macron's pension reforms and measures to liberalise the labour market that have been implemented over the last 7 years.
