(Bloomberg) — Morningstar DBRS (MORN) put a negative outlook on its assessment of France’s creditworthiness, adding to warnings over the country’s debt burden amid growing demands for defense spending and persistent risks of political instability.
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The change in outlook reflects “higher execution risks regarding France’s capacity to reduce its large fiscal deficit and high public debt ratio in the coming years, not least related to rising debt interest costs,” the ratings firm said in a statement late Friday.
DBRS kept its AA (high) rating on France, just one notch below the top level. It’s two steps lower at S&P, Moody’s and Fitch.
France’s fiscal challenges intensified last year after elections delivered a hung parliament, making it difficult for governments to pass urgent cuts to rein in deficits. In December, the tensions culminated in no-confidence vote that forced Prime Minister Michel Barnier to resign and torpedoed the 2025 budget plan.
A new government finally succeeded in passing a delayed finance bill in February that aims to narrow the deficit to 5.4% of economic output from and estimated 6% in 2024 — a smaller reduction than the initial target of 5%.
“The country has the highest level of public expenditure-to-GDP among advanced economies which has historically proved difficult to reduce, making fiscal rebalancing more challenging,” DBRS said.
Even with a budget finalized, the threat of another government collapse remains as Prime Minister Francois Bayrou lacks a majority in the National Assembly. Tensions with opposition parties are likely to return in the coming months when lawmakers debate potential changes to the pension system and the contested 2023 law that raised the minimum retirement age to 64 from 62.
At the same time, strains on France’s public finances are increasing as Europe commits to a vast increase in defense spending. The country’s 10-year bond yield climbed recently to the highest since 2011 — with the 30-year posting a similar move — though it has since retreated.
“Higher defense expenditures also could put upward pressure on the fiscal deficit over the medium term,” DBRS said.
The rating company warned that “geopolitical and trade tensions could weigh on the French economy growth.”
