France avoided a credit downgrade from Moody\u2019s, but the ratings agency painted a bleak picture of the eurozone\u2019s second-largest economy that highlighted the risks from its intractable politics.<\/p>\n
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In an announcement late Friday, Moody\u2019s kept France at Aa3\u2014two grades below the U.S. and three below Germany\u2014with a negative outlook, while ratings from peers Fitch and\u00a0S&P Global are one notch lower.<\/p>\n
France still boasts a wealthy economy and competent public institutions, according to Moody\u2019s, but the political landscape threatens to paralyze the government and prevent it from making painful deficit-reduction steps.<\/p>\n
The report flagged France\u2019s divided parliament, which is often at odds with the government, as well as political and social instability. For over a month, the country has been consumed by protests that erupted into widespread riots last weekend. <\/p>\n
At first, students decried the lack of investment in public education, then others joined in to speak out against the high cost of living as fuel prices soar due to the U.S. war on Iran. Other European countries have seen similar protests in what\u2019s been dubbed the \u201cOct. 17 Movement.\u201d<\/p>\n
At the same time,\u00a0France\u2019s looming debt has sent bond yields\u00a0to the highest levels in 24 years, flashing warning signs not seen since the eurozone debt crisis in 2011. France\u2019s public debt is now a record $4 trillion, or 119% of GDP\u2014the highest ratio since the immediate aftermath of World War II. <\/p>\n
With far-right and far-left candidates in the lead to become France\u2019s next president in the spring, markets are losing confidence that either side will take the difficult steps necessary to restore fiscal order.<\/p>\n
A 2027 budget proposal that would modestly bring the deficit down to 5% of GDP from 5.4% is now on the table but has yet to pass amid political gridlock, and Moody\u2019s warned recent unrest could constrain fiscal consolidation efforts.<\/p>\n
\u201cThe 2027 budget process coincides with some of the most extensive social protests France has experienced in many years,\u201d it said. <\/p>\n
Moody\u2019s expects the budget will eventually be adopted, but possibly by decree as the National Assembly dithers. And even then, the budget will likely do less than hoped, reducing the deficit to 5.2% of GDP due to weaker GDP growth than projected by the government and the political challenges of implementing real spending cuts. <\/p>\n
This too-little, too-late budget will not be the end of France\u2019s debt woes. Moody\u2019s said a \u201csignificant and sustained fiscal effort\u201d is required beyond the presidential elections to stabilize the debt burden, which is on track to hit 122% next year. The ratings agency isn\u2019t confident France\u2019s leaders will meet the challenge.<\/p>\n
\u201cWhile we expect that the next president and government will seek to continue to narrow France\u2019s deficit, our baseline expectation is that they are unlikely to be able to implement rapid fiscal consolidation in light of social tensions, a political environment that is likely to remain fragmented and muted GDP growth,\u201d it predicted. \u201cAs a result, the debt burden will continue to rise through the remainder of the decade.\u201d<\/p>\n
There is still some time, as Moody\u2019s pointed out that the average maturity of France\u2019s debt is around 8.5 years. That means the recent surge in borrowing costs must be sustained over an extended period to meaningfully worsen debt affordability.<\/p>\n
But France is especially vulnerable to \u201cevent risk\u201d driven by geopolitics as well as domestic politics and instability, Moody\u2019s added, describing a situation where lawmakers will have trouble tacking the most pressing problems.<\/p>\n
\u201cThe negative outlook reflects the increased risk that the fragmentation of France\u2019s political landscape will continue to impair the functioning of the country\u2019s legislative institutions,\u201d the report said. <\/p>\n
\u201cThis political instability, also visible in the current social tensions, risks hampering the French government\u2019s ability to address key policy challenges such as an elevated fiscal deficit, rising debt burden, and durable increase in borrowing costs, thus leading to a more rapid weakening in the sovereign\u2019s key credit metrics than we currently expect.\u201d<\/p>\n
Thierry Wizman and Gareth Berry, global strategists at Macquarie, also drew a connection between the\u00a0French debt crisis and the protests.<\/p>\n
In a note earlier this month, they warned that the longer the protest go on, the more likely it is that the government will cave and approve more spending, which would make the debt situation worse.<\/p>\n
That would drive up yields on French bonds, making borrowing to fund that spending even more expensive\u2014and thus worsen the problem that the rioters are complaining about.<\/p>\n
\u201cFrance is veering toward a full-blown civil crisis because of its political polarization, which heretofore had been manifested mainly in the political realm itself, and at the ballot box only,\u201d they wrote. \u201cAnd rather than being isolated events, we think a direct and self-reinforcing causal connection can be drawn between the rise in France\u2019s debt yields and the street riots of the past few days.\u201d<\/p>\n<\/div>\n
#Frances #latest #debt #warning #describes #country #governance #breaking<\/p>\n","protected":false},"excerpt":{"rendered":"
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<\/p>\n