(Bloomberg) -- French bonds and stocks lagged peers after Moody’s Ratings cut the country’s credit rating, putting more pressure on officials after far-right leader Marine Le Pen toppled the previous prime minister over a budget dispute.
The yield on 10-year French debt rose three basis point on Monday to 3.07%, increasing the premium over German bonds to 81 basis points. In equities, France’s CAC 40 gauge fell 0.6%, compared with a slip of 0.2% for the pan-European Stoxx 600 index.
While the downgrade was unscheduled, it aligns Moody’s score with those of the two other main rating agencies. The comparatively limited moves on Monday reflected the fact that French yields are already higher than other double-A rated nations.
The credit cut is the result of months of political upheaval that has sent the nation’s borrowing costs higher relative to peers. President Emmanuel Macron on Friday appointed Francois Bayrou as the country’s fourth premier in a year. He inherits a deeply divided National Assembly that has repeatedly failed to agree on fiscal reforms.
“Investors in French government bonds are usually a stable source of funding, but with downgrades this may change,” said Jens Peter Sørensen, chief analyst at Danske Bank. He predicts the French-German spread will widen to 100 basis points by the end of January.
Moody’s lowered its assessment of the euro area’s second-biggest economy to Aa3 from Aa2, three levels below the maximum rating, citing concern over the country’s public finances in the decision announced late Friday.
“At the moment there is no panic,” said Andrea Tueni, head of sales trading at Saxo Banque France, noting the limited move in French bonds.
Longer term, some investors expect the pressure from rating agencies will weigh.
“This announcement leaves little hope for a recovery in French stocks this year,” Christopher Dembik, senior investment adviser at Pictet Asset Management, said.
Over the year, the French blue chip benchmark is down more than 2%, while the broader European market gained 7.7%.
Bayrou’s predecessor, Michel Barnier, was ousted in a confidence vote on Dec. 4 after Le Pen’s National Rally lined up alongside left-wing parties to protest his plans for narrowing France’s budget deficit. France has long been out of compliance with European Union rules that require member states’ debt to be below 60% of GDP and a deficit under 3%.
Bayrou is meeting with Le Pen on Monday, kicking off an effort to form a government that can push a budget through a divided Parliament. Le Pen has said she is willing to work with the next government so long as it takes a less aggressive approach to cutting the deficit.
“There is a risk of a durable increase in financing costs which would further weaken debt affordability,” Moody’s warned in the report. “This could create a negative feedback loop between higher deficits, a higher debt load and higher financing costs, against the backdrop of significant annual borrowing needs.”
--With assistance from Alice Gledhill.
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