France’s new prime minister was appointed hours before Moody’s downgrade
France’s new Prime Minister Francois Bayrou at the handover ceremony at the Hotel Matignon in Paris, France, on Friday, December 13, 2024.
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A few hours after his appointment, the new French Prime Minister Francois Bayrou faced his first disappointment: the country’s credit rating was downgraded by Moody’s credit rating agency.
The agency announced this on Saturday He lowered France’s rating from ‘Aa2’ to ‘Aa3’ with a stable outlook, citing concerns about “political fragmentation”.
Paris is in the midst of political turmoil, with disagreements over tax and spending plans toppling the last government after just three months in power.
Moody’s said the splits would hurt France’s efforts to fix its budget deficit and debt, adding that the country’s public finances would be “significantly weakened in the coming years”.
“This is because political fragmentation is more likely to impede meaningful fiscal consolidation… Looking ahead, it is highly unlikely that the next government will sustainably reduce the size of fiscal deficits beyond next year,” the rating agency said in a statement. .
Traders reacted negatively to the downgrade of France CAC 40 It was down 0.7% on Monday morning. Meanwhile, the country’s benchmark 10-year bond yield was trading at 3.03%, only slightly lower than its Greek counterpart at 3.09%.
The difference in yields between French and Greek 10-year government bonds at the end of last month dropped to zero investors demanded the same interest in holding French debt as in holding that of historically troubled Greece, indicating the extent of concerns about the former’s political turmoil.
Uncertainty has gripped France since the summer, when inconclusive parliamentary elections saw both left- and right-wing political blocs perform well. Nevertheless, French President Emmanuel Macron appointed conservative Michel Barnier as prime minister, causing consternation among opposition parties on both sides of the political spectrum.
Barnier’s government proved short-lived, lasting only three months before its formation was ousted by a vote of no confidence in early December After French lawmakers rejected their government’s 2025 budget plans, which include billions of euros in tax increases and cuts in public spending.
Macron, under pressure to appoint a quick successor, appointed his centrist ally Bayrou as prime minister on Friday.
Bayrou, 73, is the leader of the Democratic Movement party and a centrist political veteran, advocating for France to eliminate its growing debt pile and budget deficit, which stands at around 112% of gross domestic product, by 2024. It is expected to reach 6.1% this year, even before it becomes problematic.
What are Byrow’s chances?
Analysts say Bayrou’s long standing in French politics could help when it comes to trying to reconcile far-left and far-right lawmakers on the 2025 budget.
Meanwhile, MPs in the National Assembly are expected to agree to move the 2024 budget to 2025 to avoid a shutdown on January 1.
Nevertheless, there is no certainty that a final agreement will be reached on next year’s budget, making the new government’s position as fragile as ever.
“The path to meeting the 2025 budget is unclear,” JPMorgan economist Raphael Brun-Aguerre said in a note on Friday.
“Bringing domestic demands from opposition parties could be fiscally costly and could ultimately limit the rate of fiscal consolidation next year,” he said in emailed comments.
There is speculation that Bayru will appeal to parties in the leftist New People’s Front alliance to prevent a new no-confidence motion from being tabled and pave the way for a deal on the 2025 budget.
“If Bayrou could ‘buy’ 66 Socialist MPs (far from certain), he would split the left-wing alliance of the New Popular Front, which last week voted with Marine Le Pen’s National Rally party to oust Barnier,” – Mujtaba Rahman, Eurasia Group’s Europe executive director, said in an email.
“With the support of about 20 independents, he could hope to avoid impeachment or even pass the budget as normal when revised tax and spending plans for 2025 are presented in the new year. which threat would be neutralized or greatly reduced by the combined forces of the extreme right and hard left,” Rahman said.
The Eurasian Group said its baseline scenario is that Bayrou has a narrow window of opportunity — a 60% chance — to pass the 2025 budget in the first few months of 2025. It will be based on the Barnier budget, but adjusted to appeal to moderates. left, the consultant said.
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