San Francisco Frontiers - Moody's cuts France outlook, opening door to credit downgrade

The shift reflects "increasing risk that France's government will be unlikely to implement measures that would prevent sustained wider-than-expected budget deficits and a deterioration in debt affordability," said Moody's.

It changed France's outlook from "stable" to "negative."

In the same statement, the agency affirmed France's credit rating at Aa2, saying this was supported by its "large, wealthy and diversified economy."

In lowering the outlook, Moody's said the fiscal deterioration it has seen is "beyond our expectations and stands in contrast with governments in similarly rated countries that are tending to consolidate their public finances."

France's new finance minister Antoine Armand noted the decision Friday but maintained that the country is able to carry out "far-reaching reforms."

He added that the country has economic strength and vowed to restore its finances.

Armand told AFP on Thursday the country must take "credible" steps to tackle its high deficit.

- Risks to profile -

For now, Moody's said risks to France's credit profile are heightened by its political and institutional environment.

It noted the situation is "not conducive to coalescing on policy measures that will deliver sustained improvements in the budget balance."

"As a result, budget management is weaker than we had previously assessed," it added.

New French Prime Minister Michel Barnier is hoping to bring public sector deficit to below five percent of gross domestic product next year, from an expected 6.1 percent in 2024.

But his deficit-slashing budget was presented to a hostile parliament.

France's annual budget debate has often triggered no-confidence motions and Barnier's plan sparked vocal opposition even before its full details were known.

France's debt is expected to rise to close to 115 percent of GDP next year, compared to an EU debt target of 60 percent.

In absolute terms, France's debt stood at over 3.2 trillion euros, having risen by about one trillion since President Emmanuel Macron took power in 2017.

Earlier this month, Fitch Ratings also affirmed France's rating at AA- but revised its outlook from "stable" to "negative," pointing to heightened fiscal policy risks.

On Thursday, Armand said "the work we'll be doing over the coming months will be to monitor and fine-tune our public spending" to make savings.

B.Turner--SFF