By Marc Jones
LONDON (Reuters) -The outcome of France’s parliamentary elections is negative for the country’s credit rating, Moody’s (NYSE:) warned, as a grand coalition would make decision-making and the task of getting debt under control more difficult.
France faces complex negotiations to form a government after a left-wing wave of elections on Sunday blocked Marine Le Pen’s quest to bring the far-right to power.
Possibilities include the left forming a minority government – which would be at the mercy of a vote of no confidence from rivals unless they reach an agreement – and cobbling together an unwieldy coalition of parties with almost no common ground.
“Given the constraints facing a future administration, it is unlikely that we will see expenditure-led fiscal consolidation in 2025,” Moody’s said in a note, echoing many of the concerns expressed by S&P Global on Monday.
France is also unlikely to be able to implement further tax increases as its tax-to-GDP ratio is already the highest among OECD countries, Moody’s said.
“Therefore, the budgetary implications of the election outcome are negative for credit,” said the rating agency, whose current Aa2 “stable” rating for France is well higher than that of both S&P and Fitch.
France’s spending trajectory means that the government deficit is unlikely to fall below 4% of GDP until 2027, after which the debt ratio of almost 110% will have risen a few more percentage points.
Moody’s has identified three triggers for a rating change.
* The outlook would turn negative if, for example, budget and debt figures turned out to be significantly worse than previously expected, especially interest payments relative to revenues and GDP.
* There was a declining commitment to fiscal consolidation.
* There was a reversal in the labor market liberalization and pension reforms of the past seven years, which Moody’s believed would significantly dampen the country’s growth potential and/or fiscal path over the medium term.
“The current unprecedented circumstances will test French institutions and policy effectiveness,” Moody’s said.
