Rating agencies were already closely scrutinizing France prior to Emmanuel Macron's dissolution of the Assemblée Nationale on June 9. Now that the election results are in, two have issued a clear warning. On Monday, July 8, Moody's and S&P Global Ratings (S&P) each published warnings about the possibility of the country's credit rating being downgraded further.

S&P, which lowered France's rating from the third level (AA) to the fourth (AA-) in May, noted that the lack of a majority in the Assemblée Nationale is likely to lead to economic stagnation: "We anticipate that the resulting government will struggle to implement meaningful policy measures and will face a persistent risk of a vote of no confidence."

The agency fears that growth, which it had forecast to rise this year, "will be materially below our projections for a protracted period." They're also concerned that "France cannot reduce its large budget deficit," and that interest rates could rise sharply. All scenarios could put the French credit rating "under pressure."

'A serious risk to France's rating'

For its part, Moody's warned that a potential rollback of the pension reform or other economic reforms implemented since 2017 could "materially dampen the country's medium-term growth potential and/or fiscal trajectory." Minister of the Economy and Finance Bruno Le Maire echoed the agency's concerns: "There is a serious risk to France's rating," should the reforms be abandoned.

For the time being, financial markets are reacting calmly. The spread between French and German rates, which was 0.5% before Macron's call for snap elections and reached 0.85% after the announcement, has fallen back to 0.65%.