French Prime Minister-designate François Bayrou during a handover ceremony at the Hotel Matignon in Paris, France, on Friday, December 13, 2024.
Bloomberg | Bloomberg | Getty Images
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 rating 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 difference in yields on French and Greek 10-year government bonds dropped to zero Because investors are demanding the same interest on French debt as they were on historically troubled Greek debt – a sign of the level of concern about political instability in the former.
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 only three months before being overthrown. Overturned in a no-confidence vote in early December French lawmakers have rejected the French government’s 2025 budget plan, which included tax increases and public spending cuts worth billions of euros.
Under pressure to quickly appoint a successor, Macron named his centrist ally Berou as prime minister on Friday.
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). To the left, the consulting firm said.
