Moody's Prepares to Review France's Credit Rating Amid Deteriorating Fiscal Health

The French public debt is facing scrutiny as Moody’s assesses the country’s fiscal sustainability, with reports indicating that the rating agency is broadly expected to downgrade the sovereign debt. This expected downgrade mirrors actions taken by S&P and Fitch, suggesting a consensus that France’s deteriorating fiscal indicators are becoming increasingly difficult to manage. This ongoing scrutiny is exacerbated by the nation's upcoming presidential election, which introduces a layer of significant political uncertainty that risks blurring the economic outlook for European companies as they attempt to navigate elevated energy prices and internal political risks.

One key metric under watch is the 10-year OAT-Bund spread, which measures the difference in borrowing costs between French and German government bonds. This spread is currently trading at around 175 basis points (bp), significantly wider than it was at the start of September and has reached its highest levels since 2011. A wider spread indicates that investors are demanding a greater premium to hold French debt compared to the risk-free German benchmark. While a downgrade from Moody’s is anticipated, analysts suggest it may not lead to further underperformance of French government bonds, though it is expected to keep investor attention focused on political risks and fundamental economic weaknesses in the nation.

Despite the fiscal headwinds, French companies have so far proved resilient, and economic momentum appears to be holding strong in October, as expected economic indicators suggest they are continuing to navigate current challenges relatively well. This resilience is partly supported by high anticipated readings in the S&P Global Purchasing Managers’ Indexes (PMIs) for both manufacturing and services. However, the Eurozone faces a major structural shift, characterized by elevated real rates—the rate adjusted for inflation—which remains in the 1% range for the 5-year real rate. This environment has driven a notable flight to quality, pushing investors toward safer assets like Bund swaps and reducing positions in more peripheral markets. Furthermore, fluctuations in gold prices suggest that, for many investors, the perceived risk of a recession remains limited.