France is getting its credit rating reviewed. What to expect as French debt turmoil has helped turn U.S. Treasury yields around.

By Nora Redmond

Protesters hold a placard reading: "Prison for shop-window smashers, When will we see prison sentences for those who destroy human lives?"

France's debt rating is under review, and the expectation is the report card for the troubled country due on Friday won't be a positive one.

It comes as sometimes-violent protests have broken out across the streets of the second-biggest economy in the European Union on the rising costs of living and general political dissent. What started as protests from high-school students demanding better conditions at educational institutions has spiralled into country-wide riots, with a curfew extended in Paris and outright bans on all protests announced in Lyon and Marseille.

The rating agency Moody's is due to update its rating on France's debt after U.S. markets close later on Friday. However, it does not have to make any changes if it feels the current rating is still valid.

The New York-headquartered data provider has maintained an Aa3 rating on the European country since Dec. 2024, and in the following October, it changed the outlook from "stable" to "negative," citing "the increased risk that the fragmentation of the country's political landscape will continue to impair the functioning of France's legislative institutions."

The next decision comes as French borrowing costs have risen to multi-decade highs. The yield on its 10-year government bond BX:TMBMKFR-10Y rose to 5% on Thursday, a level last seen in 2002, and early on Friday it was hovering just above that mark.

Jim Reid and Henry Allen of Deutsche Bank found that the bond has experienced its worst year for returns in 223 years, back when the Reign of Terror, an especially violent almost one-year period in the French Revolution from 1773, was also included in 10-year rolling calculations.

A renewed bout of selling also led the spread between the French 10-year yield and its German equivalent BX:TMBMKDE-10Y to reach its widest in close to 15 years. France's 10-year yield also edged higher than the 10-year U.S. Treasury BX:TMUBMUSD10Y for the first time since 2013.

Andrzej Szczepaniak, senior European economist at Japanese investment bank Nomura, told clients in a note that he expects Moody's to downgrade France's rating to A1 with a stable outcome. That would bring Moody's debt rating in line with S&P and Fitch.

"France's meaningful primary deficit raises stark debt sustainability concerns for investors," he wrote. "France appears to lack the political ability or will to make meaningful changes to reduce the deficit or introduce structural reforms that lift growth over the medium term."

That's also the expectation of Brent Donnelly, president of Spectra Markets.

"A surprise would either be 1) an affirmation of Aa3 with a negative outlook (bullish), or 2) a two-notch cut (bearish)," Donnelly said. "Two notches would be a barnburner."

The French government has not yet passed its 2027 budget, facing pressure for a deficit getting near to 5.4% of gross domestic product, which is considerably higher than any other country in the bloc and above the EU's limit of 3%. But France has also been unable to run a balanced budget since 1974.

Robin Brooks, a senior fellow at the Brookings Institution and former strategist at Goldman Sachs, said the French turmoil so far has had the effect of contagion into the rest of the high-debt members of the eurozone, like Italy and Spain, while seeing a flight to safety to U.S. Treasurys and low-debt European countries like Germany, Sweden and Switzerland.

He described the current situation as a "global game of whack-a-mole" where the only certainty is that high-debt countries will play games to cap yields. He said that the French debt blow-up could end, however, pointing to a sell-off in oil prices as a potential trigger.

-Nora Redmond

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