France's Credit Rating Maintained Amid Negative Outlook

France has narrowly avoided another downgrade of its sovereign credit rating. On Friday, October 25, 2025, US ratings agency Moody’s announced it would maintain France’s rating at Aa3, the fourth-highest level on its scale. But this reprieve may be short-lived: Moody’s simultaneously assigned a negative outlook to the rating, a clear warning sign that a downgrade is likely in the coming months if conditions don’t improve. This decision comes at a particularly tense time for France’s public finances, with ongoing political instability since the dissolution of the National Assembly in June 2024.

Unlike its competitors Fitch and S&P Global, which both downgraded France to A+ on September 12 and October 17 respectively, Moody’s opted for a more cautious approach. Still, the message is the same: France must urgently return to fiscal discipline and break the political deadlock that’s paralyzing the country. As François Villeroy de Galhau, Governor of the Bank of France, pointed out, all the major ratings agencies are now sounding the alarm over France’s political instability and serious budgetary challenges.

A Decision Driven by Chronic Political Instability

The Threat of Parliamentary Fragmentation

Moody’s main concern isn’t France’s economic fundamentals. The agency acknowledges that the country boasts significant economic strengths, a wealthy and diversified economy, a robust banking sector, and solid household and corporate finances. French public institutions are also described as highly competent.

The real issue lies in the fragmentation of the political landscape, which threatens the smooth functioning of legislative institutions. The lack of a clear majority in the National Assembly makes it extremely difficult to pass the budget or any major structural reforms. This institutional paralysis could severely limit the government’s ability to tackle the country’s biggest challenges: a high budget deficit, ever-rising public debt, and soaring borrowing costs.

Rolling Back Pension Reform: A Troubling Signal

Moody’s explicitly points to the abandonment of key structural reforms, especially the suspension of the 2023 pension reform. This measure, secured by the Socialist Party after lengthy negotiations, represents a significant setback in efforts to clean up public finances, according to the agency. Back in April, Moody’s made it clear that reversing this reform would be grounds for a downgrade.

While the short-term budget impact of this suspension is moderate, the medium- and long-term costs could be substantial. If the suspension drags on for several years, it risks worsening the government’s fiscal challenges and hurting growth potential by reducing labor supply.

Public Finances in a Worrying Spiral

France’s Budget Deficit: The Highest in the Eurozone

France currently has the largest budget deficit in the entire eurozone. The government forecasts a deficit of 5.4% of GDP for 2025—about 160 billion euros—before a projected reduction to 4.7% in 2026, or roughly 144 billion euros. Economy and Finance Minister Roland Lescure has set a goal of bringing the deficit below the symbolic 3% of GDP threshold by 2029, in line with EU rules. Yet few observers believe these targets are realistic in the current political climate.

French public debt has reached staggering levels. It’s expected to hit 115.9% of GDP by the end of 2025, up 2.7 points in a year. In absolute terms, it’s now approaching 3.5 trillion euros, making it the largest public debt in the eurozone by volume, and the third largest as a percentage of GDP, behind Greece and Italy. The Finance Ministry hopes this upward trend will slow, peaking at 118.7% by the end of 2027 before gradually declining.

Soaring Interest Payments on the Debt

One of the most alarming aspects of the situation is the rapid rise in interest payments France must make on its debt. In just one year, these payments have jumped from 60 to 65 billion euros. Projections for 2026 estimate 74 billion euros, with forecasts for 2028 approaching 100 billion euros annually.

This surge is driven by two factors: a larger stock of debt to refinance, and higher interest rates demanded by financial markets. Investors now require a higher risk premium to lend to France, reflecting growing concerns about the country’s ability to restore fiscal order.

Mixed Reactions from Financial Markets

Investors Already Priced in a Downgrade

Moody’s decision didn’t trigger a shockwave in financial markets, contrary to what some might have feared. The reason is simple: investors have long factored in the deterioration of France’s public finances. According to Paul Chollet, chief economist at Crédit Mutuel Arkéa’s trading desk, markets are currently pricing French debt at an A or A- level—two to three notches below Moody’s maintained Aa3 rating.

This market anticipation means France is already paying a significant premium on its borrowing, as if it had already been downgraded. The yield spread between French and German government bonds has widened considerably in recent months, reflecting growing skepticism among international investors.

Cautious Optimism from Some Analysts

Not everyone is sounding the alarm. Samy Chaar, chief economist at Lombard Odier, takes a more optimistic view. He notes that, for now, the French economy is holding up against political instability: business activity and the job market remain resilient, and there are no signs of a major economic crisis. Growth is modest—0.7% expected for 2025 and 1% for 2026—but still positive.

According to Chaar, France’s debt sustainability doesn’t appear to be in immediate danger, and the country isn’t at risk of default. Generally, a country doesn’t default when its current account is near zero percent of GDP, which is the case for France. Moreover, political and fiscal turbulence is nothing new for international markets, which have learned to live with France’s volatility. As a result, political instability is unlikely to trigger a full-blown financial crisis.

Real-World Consequences for Households and Businesses

Higher Borrowing Costs

The gradual downgrade of France’s sovereign rating and rising government borrowing costs have a direct impact on the entire economy. Banks, which partially refinance themselves on the bond markets, are seeing their own funding costs rise. This increase is automatically passed on to consumers in the form of higher mortgage rates, and to businesses through more expensive financing.

French households looking to buy a home or fund renovations now face less favorable lending conditions than in the past. Businesses, for their part, are seeing investment costs rise, which can slow down their development and modernization plans. This situation weighs on household consumption and productive investment—two key drivers of economic growth.

Eroding Confidence Hits the Real Economy

Beyond the purely financial aspects, the ongoing deterioration of France’s image among ratings agencies and financial markets is undermining economic confidence. Foreign investors may hesitate to set up shop in France or expand their operations, fearing prolonged instability. French companies may delay investment decisions while waiting for greater political and fiscal clarity.

This loss of confidence is also reflected in business and consumer sentiment surveys, where indicators of business leader and household morale are trending downward. The uncertainty that’s prevailed since the dissolution of the National Assembly is weighing on economic activity and keeping growth below its potential.

The High-Stakes 2026 Budget Vote

A Tense Parliamentary Debate

Debate over the 2026 Finance Bill kicked off on Friday, October 25 in the National Assembly amid a particularly tense atmosphere. The government faces conflicting demands from various parliamentary groups, without a stable majority to pass its budget. The Socialist Party, buoyed by its victory in suspending the pension reform, is once again threatening a no-confidence vote if it doesn’t get its way on higher taxes for the wealthy.

This puts the government in a tough spot: giving in to the Socialists’ demands could further undermine France’s fiscal credibility in the eyes of ratings agencies and markets, but refusing could lead to a no-confidence vote and a major political crisis. Minister Roland Lescure acknowledged Moody’s decision as proof of the urgent need to build a collective path toward budget compromise.

The Need for a Political Agreement

The government says it’s determined to hit the 5.4% of GDP deficit target for 2025 and to pursue an ambitious path to bring the deficit below 3% of GDP by 2029, all while supporting growth. But these intentions run up against political reality: without an agreement among the various political forces in the National Assembly, no ambitious budget can be passed or implemented.

Time is running out. If a budget is passed by December 31, it could reassure Moody’s and delay a potential downgrade. But if the gridlock continues, France risks losing its last double-A rating and seeing its international credibility take another hit. According to Roland Lescure, only by reaching the 3% deficit threshold can the country stabilize its debt—a goal that seems distant today.

Outlook and Scenarios for the Coming Months

The Risk of a Downgrade Domino Effect

France now finds itself in a situation where another downgrade by Moody’s could trigger a domino effect. All three major ratings agencies would then have downgraded France, sending a very negative signal to international investors. This could spark another jump in interest rates on French debt and further accelerate the deterioration of public finances.

Moody’s decision to maintain the Aa3 rating offers a temporary reprieve, but the negative outlook means the agency will reassess the situation in the coming months. If budget debates remain stalled and no structural reforms are adopted, a downgrade will become inevitable. Conversely, a solid political agreement and the adoption of a credible budget could help stabilize the situation.

What It Will Take to Turn Things Around

To avoid further downgrades and regain market confidence, France needs to meet several conditions. First, it must pass a realistic, ambitious budget that clearly outlines a path to deficit reduction. Next, it must implement structural reforms to boost economic competitiveness and cut long-term public spending. Finally, it must restore political stability so institutions can function normally.

Achieving these goals requires compromise among the various political forces—a willingness to rise above partisan divides in favor of the national interest. It’s a tall order, but it’s essential if France wants to avoid sinking into a prolonged crisis of confidence with serious economic and social consequences.

Conclusion: A Reprieve That Shouldn’t Be Misleading

Moody’s decision to maintain France’s Aa3 rating shouldn’t obscure the seriousness of the situation. The negative outlook that comes with this decision is a final warning before a downgrade that now seems all but inevitable if nothing changes. France still has a few months to get back on track, but time is not on its side.

Chronic political instability and the lack of a clear majority in the National Assembly are now the main obstacles to restoring public finances. Without broad political agreement on a credible budget and necessary structural reforms, the country risks seeing its debt continue to soar and its international credibility erode. The consequences wouldn’t just be technical or financial—they would directly impact households and businesses through higher borrowing costs and weaker economic growth.

France still has considerable strengths: a diversified economy, a solid banking sector, and high-quality institutions. But these assets won’t be enough unless the country quickly regains political stability and fiscal discipline. The next review by Moody’s in a few months will be a crucial test for France’s economic and financial future.

---

❓ FAQ - Frequently Asked Questions

1. What did Moody’s decide about France’s credit rating, and how does it compare to Fitch and S&P?

On October 25, 2025, Moody’s kept France’s sovereign rating at Aa3, the fourth-highest on its scale, but assigned a negative outlook. This contrasts with Fitch and S&P Global, which both downgraded France to A+ on September 12 and October 17, respectively. While Moody’s took a more cautious approach by maintaining the Aa3 notch, the underlying message is similar across agencies: France must quickly restore fiscal discipline and overcome its political deadlock. The decision arrives amid heightened scrutiny of France’s public finances and ongoing political instability following the June 2024 dissolution of the National Assembly.

2. What does an Aa3 rating with a negative outlook mean in practice?

Aa3 signals a relatively high-quality credit profile, but the negative outlook is a clear warning that a downgrade is likely in the coming months if conditions don’t improve. In other words, Moody’s is granting a temporary reprieve while flagging mounting risks tied to political fragmentation, budgetary slippage, and stalled reforms. The agency will reassess France as the budget process unfolds. Notably, markets have already priced France more harshly—at levels akin to A or A-—so the borrowing premium France pays today already reflects expectations of weaker credit quality.

3. What is driving Moody’s concerns: economics or politics?

Moody’s says France’s core economic fundamentals remain strong: a wealthy, diversified economy, robust banks, solid household and corporate finances, and high-quality institutions. The main risk stems from politics. A fragmented National Assembly without a clear majority makes it very difficult to pass the budget or implement structural reforms. This paralysis threatens the government’s capacity to address the highest budget deficit in the eurozone, rising public debt, and increasing borrowing costs. In short, institutional gridlock—not economic weakness—is at the heart of Moody’s negative outlook.

4. How did the suspension of the 2023 pension reform factor into Moody’s stance?

Moody’s explicitly cites the suspension of the 2023 pension reform—secured by the Socialist Party—as a troubling signal. The agency had warned as early as April that reversing this reform would be grounds for a downgrade. While the short-term budget impact is moderate, the medium- and long-term costs could be significant, especially if the suspension persists. Over time, this could worsen fiscal pressures and reduce growth potential by shrinking labor supply. The move is therefore seen as a setback to efforts to stabilize public finances.

5. How large are France’s budget deficit and public debt, and what are the targets?

France currently posts the largest budget deficit in the eurozone. The government projects a deficit of 5.4% of GDP in 2025 (about €160 billion), falling to 4.7% in 2026 (roughly €144 billion). The stated goal is to bring the deficit below 3% of GDP by 2029, aligning with EU rules—though many observers doubt this is realistic in today’s political climate. Public debt is expected to reach 115.9% of GDP by end-2025 (approaching €3.5 trillion), the eurozone’s largest by volume and third highest as a share of GDP, behind Greece and Italy. The Finance Ministry expects a peak near 118.7% by end-2027, then a gradual decline.

6. Why are France’s interest payments on its debt rising so quickly?

Debt service is climbing due to a larger stock of debt that must be refinanced and higher interest rates demanded by investors. Interest payments rose from €60 to €65 billion in one year, are projected at €74 billion in 2026, and could approach €100 billion annually by 2028. Markets are requesting a higher risk premium to lend to France, reflecting skepticism about fiscal consolidation amid political stalemate. This dynamic is visible in the wider yield spread between French and German government bonds.

7. How did financial markets react to Moody’s decision?

There was no shock in markets because the deterioration in France’s public finances has long been priced in. According to Paul Chollet, chief economist at Crédit Mutuel Arkéa’s trading desk, investors are already valuing French debt at an A or A- level—two to three notches below Moody’s Aa3. As a result, France already pays a significant borrowing premium, effectively as if it had been downgraded. The widening spread versus German bonds underscores investors’ caution toward France.

8. Is France facing an immediate financial crisis or risk of default?

Some analysts are more optimistic. Samy Chaar of Lombard Odier notes the economy is holding up despite political instability: activity and employment remain resilient, with modest but positive growth expected (0.7% in 2025 and 1% in 2026). He argues debt sustainability isn’t in immediate danger and France isn’t at risk of default. Historically, countries don’t default when the current account is near zero percent of GDP, which is France’s case. Markets are also accustomed to France’s political and fiscal turbulence, making a full-blown financial crisis unlikely at this stage.

9. How do downgrades and rising sovereign yields affect households and businesses?

Higher government borrowing costs feed through to the economy. Banks partly fund themselves in bond markets; when their funding costs rise, they pass them on via higher mortgage rates and more expensive corporate loans. Households face less favorable lending conditions for home purchases and renovations. Companies encounter higher investment costs, which can slow modernization and expansion. Beyond financing, the erosion of France’s image with ratings agencies and markets undermines confidence: foreign investors may hesitate, and domestic firms can delay decisions. Business and consumer sentiment indicators have been trending down, weighing on growth.

10. What’s at stake in the 2026 budget vote?

Debate on the 2026 Finance Bill began on October 25 in a tense National Assembly. Without a stable majority, the government faces conflicting demands. The Socialist Party, buoyed by the pension reform suspension, is threatening a no-confidence vote if it doesn’t secure higher taxes on the wealthy. Conceding could harm fiscal credibility with ratings agencies and markets; refusing could trigger a political crisis. Economy and Finance Minister Roland Lescure frames Moody’s move as an urgent call to build a collective budget compromise.

11. What deadlines and actions could help France avoid a downgrade in the coming months?

Passing a budget by December 31 could reassure Moody’s and potentially delay a downgrade. More broadly, the article outlines three needs: adopt a realistic, ambitious budget with a clear path to deficit reduction; implement structural reforms to bolster competitiveness and reduce long-term spending; and restore political stability so institutions can function. Achieving the 3% deficit threshold is cited by Minister Lescure as key to stabilizing debt, though it currently appears distant. All of this hinges on cross-party compromise in the National Assembly.

12. What is the feared ‘domino effect’ if Moody’s downgrades France?

If Moody’s also downgrades France, all three major agencies would have cut the rating, sending a very negative signal to international investors. That could trigger another jump in interest rates on French debt, further worsening the budget balance as debt service grows and accelerating the deterioration of public finances. The current Aa3 with negative outlook is a temporary reprieve; absent progress on the budget and reforms, a downgrade becomes likely. Conversely, a credible political agreement and budget could help stabilize the situation.