French banking stocks tumbled as Moody’s downgraded the ratings of seven major banks, deepening market concerns fueled by ongoing political instability in the country. French government bonds and stock markets also faced significant selloffs, reflecting a shift in investor sentiment.
Moody’s announced the downgrade just days after lowering France’s sovereign credit rating, citing prolonged political fragmentation. The ratings agency warned that “France’s public finances will be substantially weakened over the coming years, because political fragmentation is more likely to impede meaningful fiscal consolidation.” Moody’s further emphasized, “There is now very low probability that the next government will sustainably reduce the size of fiscal deficits beyond next year.”
The downgrade triggered broad declines in France’s banking sector. Shares of BNP Paribas fell 0.97%, while Credit Agricole dropped 0.84%. On a broader scale, the Euro Stoxx banking sector slumped 1.49%, making it the worst-performing group in the Stoxx 600 index on Tuesday.
France’s deficit is projected to rise to 6.1% of its Gross Domestic Product (GDP) in 2024—more than double the European Union’s threshold of 3%. The country’s debt has soared to a record €3.228 trillion, equivalent to 112% of GDP, placing France behind only Greece and Italy in the eurozone.
The political crisis intensified with the ousting of Michel Barnier as Prime Minister after his 2025 budget proposal was rejected by both the right-wing National Rally and the left-wing alliance. The controversial plan aimed to lower the deficit to 5% by 2025, but opposition from both sides thwarted its approval.
To stave off immediate fiscal gridlock, the French National Assembly passed a special law on Monday to temporarily maintain government spending and tax collection. However, the lack of a full 2024 budget leaves newly appointed Prime Minister François Bayrou grappling with the same challenges that led to Barnier’s removal.
France’s credit standing has faced multiple downgrades this year. In May, S&P Global Ratings downgraded the country’s credit score from AA to AA-, projecting deficits of around 3% of GDP through 2027. Fitch also previously cut France’s bond ratings, and on Saturday, Moody’s reduced the country’s credit score from Aa2 to Aa3.
