Francois Bayrou, France’s incoming prime minister, during the handover ceremony at the Hotel Matignon in Paris, France, on Friday, Dec. 13, 2024.
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Within hours of being appointed, France’s new prime minister Francois Bayrou faced his first upset: the country’s credit rating was downgraded by credit rating agency Moody’s.
The agency announced on Saturday that it was cutting France’s rating to “Aa3” from “Aa2” with a stable outlook, citing concerns over “political fragmentation.”
Paris is in the midst of a political whirlwind, with disagreements over tax and spending plans bringing down the last government after just three months in power.
Moody’s said the divisions would harm attempts to fix France’s budget deficit and debt, adding that the country’s public finances will be “substantially weakened over the coming years.”
“This is because political fragmentation is more likely to impede meaningful fiscal consolidation … Looking ahead, there is now very low probability that the next government will sustainably reduce the size of fiscal deficits beyond next year,” the rating agency said in a statement.
Traders have reacted negatively to the downgrade, with France’s CAC 40 down 0.7% Monday morning. Meanwhile, the yield on the country’s benchmark 10-year bond was trading at 3.03%, only a little below that of its Greek counterpart, at 3.09%.
Late last month, the difference in yields on the French and Greek 10-year government bonds fell to zero as investors demanded the same interest for holding French debt as that of historically-troubled Greece’s — indicating the extent of concerns over the former’s political turmoil.
Uncertainty has gripped France since the summer when indecisive parliamentary elections saw both the left- and right-wing political blocs perform well. Despite that, French President Emmanuel Macron installed conservative Michel Barnier as prime minister, prompting consternation among opposition parties on both sides of the political spectrum.
Barnier’s government proved to be short-lived, lasting just three months before being toppled in a vote of no confidence at the start of December after French lawmakers rejected his government’s 2025 budget plans that included billions of euros’ worth of tax hikes and public spending cuts.
Under pressure to appoint a successor quickly, Macron named his centrist ally Bayrou prime minister on Friday.
Bayrou, 73, is the leader of the Democratic Movement party and a political veteran from the center ground who has advocated for France to address its growing debt pile — seen at around 112% of gross domestic product in 2024 — and its yawning budget deficit, expected to hit 6.1% this year, even before they were problematic.
What are Bayrou’s chances?
Analysts say Bayrou’s longstanding position in French politics could help when it comes to renewed attempts to get lawmakers on the far left and far right to agree to a 2025 budget.
In the meantime, deputies in the National Assembly are expected to agree to roll over the 2024 budget into 2025 in order to prevent a shutdown on Jan. 1.
Nonetheless, there’s no clarity on an eventual agreement on next year’s budget will be reached, making the new government’s position as fragile as the last.
“The path towards securing a 2025 budget is unclear,” Raphael Brun-Aguerre, an economist at JPMorgan, said in a note Friday.
“Bringing onboard demands from opposition parties may be fiscally costly and the degree of fiscal consolidation may be limited next year as a result,” he said in emailed comments.
There is speculation that Bayrou will look to parties within the left-wing New Popular Front alliance to prevent another no-confidence motion from being tabled, and to pave the way for an agreement on the 2025 budget.
“If Bayrou can ‘buy off’ the 66 Socialist deputies (far from certain), he would have split the left wing alliance of New Popular Front which voted with Marine Le Pen’s National Rally party to bring down Barnier last week,” Mujtaba Rahman, managing director of Europe at Eurasia Group, said in an emailed note.
“With the support of 20 or so independents he could hope to avoid a censure motion or even pass a budget in the normal way once revised tax and spending plans for 2025 are presented in the new year. Any threat of another censure vote in the Assembly by the combined forces of far right and hard left would have been neutralised or much reduced,” Rahman said.
Eurasia Group said its base case scenario is that Bayrou has a narrow window of opportunity — a 60% probability — to enact a 2025 budget in the first few months of 2025. This would be based on the Barnier budget but amended to appeal to the moderate left, the consultancy said.