France's new prime minister faces a tough start after Moody's downgrades the country's credit rating.

• On Saturday, Moody's announced that France's credit rating was downgraded from "Aa2" to "Aa3" with a stable outlook due to concerns over "political fragmentation."
• The CAC 40 in France dropped 0.7% Monday morning, while the yield on the country's 10-year bond was trading at 3.03%, slightly below the Greek counterpart's yield of 3.09%.
• Could Francois Bayrou's longstanding presence in French politics aid in renewed efforts to secure agreement from lawmakers on a 2025 budget, despite the uncertainty surrounding his approach?

Moody's downgraded France's credit rating hours after Francois Bayrou was appointed prime minister.

On Saturday, the agency declared that France's rating was being downgraded from "Aa2" to "Aa3" with a stable outlook, due to worries about "political fragmentation."

The French government has been toppled after only three months in power due to disagreements over tax and spending plans.

Moody's stated that the divisions would negatively affect France's efforts to address its budget deficit and debt, predicting that the country's public finances will be significantly weakened in the coming years.

Political fragmentation may hinder effective fiscal consolidation, and it is unlikely that the next government will sustainably reduce fiscal deficits beyond next year, according to the rating agency.

The downgrade of France's credit rating has caused traders to react negatively, with the country's stock market falling 0.7% Monday morning. Additionally, the yield on France's 10-year bond is currently trading at 3.03%, just slightly below the yield on Greece's benchmark bond, which stands at 3.09%.

The French and Greek 10-year government bonds had the same yield last month, indicating the extent of concerns over the former's political turmoil.

Since the summer, uncertainty has gripped France due to indecisive parliamentary elections that saw both the left- and right-wing political blocs perform well. Despite this, French President Emmanuel Macron appointed conservative Michel Barnier as prime minister, causing consternation among opposition parties on both sides of the political spectrum.

In December, French lawmakers rejected Barnier's government's 2025 budget plans, leading to a vote of no confidence and the toppling of his government after just three months in power.

On Friday, Macron appointed his centrist ally Bayrou as prime minister under pressure to name a successor quickly.

Bayrou, a 73-year-old political veteran and leader of the Democratic Movement party, has been advocating for France to tackle its growing debt pile, estimated at 112% of GDP in 2024, and its projected budget deficit of 6.1% in 2021, even before they became major issues.

What are Bayrou's chances?

The longstanding position of Bayrou in French politics could aid in renewed efforts to reach a 2025 budget agreement between far-left and far-right lawmakers.

To prevent a shutdown on Jan. 1, the National Assembly's deputies are expected to approve the rollover of the 2024 budget into 2025.

The new government's position remains fragile due to the uncertainty of reaching an agreement on next year's budget.

JPMorgan economist Raphael Brun-Aguerre stated in a Friday note that the route to obtaining a 2025 budget is uncertain.

The addition of opposition party demands may result in financial costs and limit the level of fiscal consolidation next year, according to his email comments.

It is rumored that Bayrou may seek the support of left-wing parties in the New Popular Front alliance to prevent another no-confidence vote and facilitate an agreement on the 2025 budget.

If Bayrou succeeds in winning over the 66 Socialist deputies (uncertain), he will have fractured the left-wing alliance of New Popular Front, which supported Marine Le Pen's National Rally party in bringing down Barnier last week, according to Mujtaba Rahman, managing director of Europe at Eurasia Group, in an email.

Rahman stated that with the support of around 20 independents, he could potentially avoid a censure motion or pass a budget in the usual manner once the revised tax and spending plans for 2025 are presented in the new year. Any threat of another censure vote in the Assembly by the combined forces of far right and hard left would have been neutralized or significantly reduced.

The Eurasia Group predicts that Bayrou has a 60% chance of passing a 2025 budget in the first few months of 2025, which would be based on the Barnier budget but modified to appeal to the moderate left.