Despite the recent deterioration of the country’s public finances, the Moddy’s rating agency has maintained France’s sovereign rating. A decisive decision for the government and the financial markets.
France escaped a downgrade by Moody’s. On Friday April 26, the rating agency maintained France’s sovereign rating at the “Aa2” level with a stable outlook, judging the risk of default to be very low. A decision which comes in a difficult economic context for France. The government must face lower growth forecasts (from 1.4% to 1% for 2024), a public deficit that remains high (“greater than 5%” of GDP in 2023, with the objective of reducing it to 4.4% in 2024) and still galloping inflation.
Despite the recent deterioration of the country’s public finances, the maintenance of the rating was seen as good news at Bercy. Rating agencies have significant power in financial markets. If their role is to measure the risk of non-repayment of debts contracted by an issuer through grades (from AAA, which rewards the best students, to C), the organizations rely on numerous criteria, such as prospects for economic growth, the evolution of public spending, taxation, the weight of the debt.
An increase in the rating with these agencies is a good signal to investors. The more creditworthy a country is considered, the lower its borrowing rate: investors have confidence in its repayment capacity and therefore take a lower risk. In the event of a drop in the rating, the effects can be multiple. A policy made of budgetary efforts which can lead to an increase in taxes. Difficulties in borrowing may become greater, thereby adding to an already extremely heavy debt burden. Thus, a state which seeks to be lent money on less favorable terms, increases its public debt even more. This is why the ratings are so awaited, they help to form an opinion on the solvency of a country.
