Unrest-hit France poised for Moody's ratings verdict

By Leigh Thomas and Dhara Ranasinghe

PARIS, Oct 23 (Reuters) - France faces the threat of a ratings downgrade on Friday, adding to pressure on a government already struggling to contain social unrest and shore up its strained finances.

Moody's decision, in a regular ratings review, is due after US financial markets close at 2000 GMT. Most analysts expect it to cut its Aa3 rating, which has carried a negative outlook since October last year.

A downgrade would bring Moody's in line with Standard & Poor's and Fitch, which moved earlier as France struggled to rein in its public finances after a 2024 snap election produced a hung parliament and political paralysis.

A one-notch downgrade by Moody's would leave France well within investment grade, though successive cuts could shrink the pool of investors able or willing to hold French bonds or accept them as collateral.

French borrowing costs already exceed those of lower-rated peers such as Italy, as investors fret over the budget deficit - one of the euro zone's biggest - and a presidential election on April 18 and May 2 next year that polls suggest the far right could win.

TV images of weekend protests descending into riots and looting underscore the political difficulty of pushing budget cuts through.

That helped push the risk premium on French government debt over safe-haven German bonds to its highest in 15 years on Thursday, while France's benchmark 10-year bond yield hit 5.14%, its highest level since July 2002.

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OUTLOOK IN FOCUS

With a downgrade largely priced in, attention will turn to Moody's outlook for future rating moves, said Rushabh Amin, a portfolio manager at Allspring Global Investments.

Moody's said earlier this month that the French government's ability to overcome "fragmentation in parliament" would be the key factor for its next rating move.

That task looks harder after violent protests over underfunded schools escalated last weekend into riots during mass cost-of-living demonstrations. The government has so far refused to release more school funding or raise the minimum wage, and further protests are planned for Saturday.

In parliament, the lower house has scrapped some key savings measures in the 2027 budget, which targets a deficit of 5% of output versus 5.4% this year. Opposition parties show little appetite for compromise before the election, picking apart cuts while adding spending.

"You want to wait and see how the narrative evol.ves over the next six months into the election. That's going to have a more meaningful impact on the spread," Amin said.

Pressure on French debt could grow after the presidential vote if Moody's, S&P and Fitch all cut France to BBB - just above junk status - potentially forcing sales by those investors with rating limits, said Mike Bell of RBC BlueBay Asset Management.

"That's where it could really start to get more ugly," he added.

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