François Bayrou, incoming French Prime Minister, during the handover ceremony at the Hotel Matignon in Paris, France, on Friday, December 13, 2024.
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Within hours of his appointment, new French Prime Minister François Bayrou faced his first surprise: the credit rating agency Moody's downgraded the country's credit rating.
The agency announced this on Saturday France's rating downgraded To “Aa3” from “Aa2” with a stable outlook, citing concerns about “political division.”
Paris is witnessing a political whirlpool, as disagreements over tax and spending plans led to the downfall of the last government after only three months of assuming power.
Moody's said the divisions would harm attempts to repair France's budget deficit and debt, adding that the country's public finances “will weaken significantly over the coming years.”
“This is because political division is likely to hinder effective fiscal consolidation… Looking ahead, there is now a very low possibility that the next government will reduce the size of the fiscal deficit sustainably after next year,” the credit rating agency said in a statement. .
Traders, including France, reacted negatively to the reduction CAC 40 Down 0.7% on Monday morning. Meanwhile, the yield on the country's benchmark 10-year bond was trading at 3.03%, just below its Greek counterpart, at 3.09%.
Late last month, the difference in yields on 10-year French and Greek government bonds became apparent decreased to zero Investors demanded the same interest on holding French debt as that of historically troubled Greece – indicating the extent of concerns about political turmoil in Greece.
Uncertainty has gripped France since the summer when inconclusive parliamentary elections saw both left- and right-wing political blocs perform well. Despite this, French President Emmanuel Macron appointed conservative Michel Barnier as prime minister, sparking panic among opposition parties on both sides of the political spectrum.
Barnier's government proved short-lived, lasting only three months before it was formed He was ousted in a vote of no confidence at the beginning of December After French lawmakers rejected his government's 2025 budget plans that included billions of euros in tax increases and public spending cuts.
Under pressure to quickly appoint a successor, Macron appointed his centrist ally Bayrou as prime minister on Friday.
Bayrou, 73, is the leader of the Democratic Movement party and a veteran centrist politician, and has called on France to address its growing debt pile – expected to reach about 112% of GDP in 2024 – and its massive budget deficit. It is expected to reach 6.1% this year, even before it causes problems.
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Analysts say Bayrou's long-standing position in French politics could help when it comes to renewed attempts to persuade lawmakers from the far left and far right to approve the 2025 budget.
Meanwhile, representatives in the National Assembly are expected to agree to extend the 2024 budget to 2025 in order to prevent a shutdown on January 1.
However, there is no clarity on reaching a final agreement on next year's budget, making the new government's position as fragile as its predecessor.
“The path toward securing the 2025 budget is unclear,” Rafael Brun Aguirre, an economist at JPMorgan, said in a note on Friday.
“Meeting the demands of opposition parties could be financially costly and the degree of fiscal consolidation may be limited next year as a result,” he said in email comments.
There is speculation that Bayrou will look to parties within the left-wing New Popular Front coalition to prevent another no-confidence motion from being tabled, and pave the way for an agreement on the 2025 budget.
Mujtaba Rahman said: “If Bayrou had been able to buy out the 66 Socialist deputies (which is not at all certain), it would have split the leftist coalition of the New Popular Front, which voted with Marine Le Pen’s National Rally to oust Barnier last week.” The managing director for Europe at Eurasia Group said in an email note.
“With the support of 20 or so independents, he can hope to avoid a no-confidence motion or even pass the budget in the normal way once revised 2025 tax and spending plans are tabled in the new year. Any threat of another no-confidence vote in the Assembly,” Rahman said. For the far right and far left it would have been neutralized or significantly reduced.
The Eurasia Group said its base scenario is that Bayrou has a narrow window of opportunity – a 60% chance – to enact the 2025 budget in the first few months of 2025. That would be based on Barnier's budget but adjusted to appeal to moderates. The consultation said that the left.
