Moody’s has downgraded the ratings of seven major French banks, including BNP Paribas and Credit Agricole, citing spiralling national debt and political dysfunction that could persist into 2025.
The move reflects broader concerns about France’s ability to address its growing €3.2 trillion debt burden amid worsening fiscal conditions and a fragmented government.
This development comes shortly after Moody’s cut France’s sovereign debt rating from Aa2 to Aa3.
The agency attributed the downgrade to uncertainty surrounding the government’s capacity to implement fiscal reforms and curb deficits in the face of rising borrowing costs and political instability.
With foreign investors holding nearly half of France’s national debt, the situation underscores the fragile state of the country’s financial system.
Record debt and a fractured political landscape
France’s public debt reached an unprecedented €3.2 trillion by Q2 2024, and its budget deficit has risen to 6.1%—well above the EU’s target of 3%.
Moody’s warned of a vicious cycle: escalating deficits, increased debt servicing costs, and higher annual borrowing requirements.
The political turmoil further compounds the issue.
The collapse of Michel Barnier’s government in December, following a failed attempt to pass a deficit-reduction budget, has left the country in political gridlock.
Marine Le Pen’s far-right National Rally and left-wing alliances continue to block key reforms.
Emmanuel Macron’s appointment of François Bayrou as the new prime minister has done little to inspire confidence in the government’s ability to break the deadlock.
Moody’s stressed that political fragmentation diminishes the likelihood of meaningful fiscal reforms, further eroding international creditors’ confidence in French public finances.
French banks face limited contagion risk
Despite the downgrade, Moody’s upgraded the outlook for French banks from negative to stable, suggesting limited direct exposure to national debt.
French banks hold relatively small amounts of government bonds, reducing the risk of significant contagion should foreign investors pull out of French debt markets.
Rising borrowing costs remain a concern.
By the end of November, French borrowing rates surpassed those of Greece for the first time since the sovereign debt crisis, a sign of deteriorating fiscal credibility.
Foreign investors, who account for around 50% of France’s national debt holdings, add another layer of vulnerability.
Compared to domestic investors, foreign creditors are more likely to react negatively to political instability, potentially exacerbating the crisis if they withdraw funds.
What does this downgrade reflect?
The downgrade reflects more than immediate political strife—it signals a grim long-term outlook for France’s financial stability.
Moody’s statement highlighted that without significant reforms, the country faces prolonged fiscal deterioration.
While French banks might provide a buffer by purchasing additional government debt, the broader economy remains precariously positioned.
The combination of record-high debt, political paralysis, and declining fiscal credibility places France at a crossroads.
Addressing the financial crisis will require not only fiscal reforms but also political consensus—a tall order in the current climate.
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