By Stefano Rebaudo

(Reuters) – Rating agency Moody’s will review France’s sovereign rating on Friday in what could be the next test of sentiment for bond investors.

Moody’s rates France at Aa2 and the market has already priced in the risk of a downgrade given concerns about the country’s finances.

WHY IT’S IMPORTANT

Rating agency decisions affect how easily countries can raise funds on the bond markets. A downgrade would pile pressure on an already weak French government and might impact demand for French debt among foreigners – the dominant players in the country’s bond market.

France is one of Europe’s biggest bond markets with outstanding debt of around 2.6 trillion euros ($2.8 trillion).

BY THE NUMBERS

The gap between French and German 10-year yields – the premium investors demand to hold France’s bonds – was last at 74 bps. It was around 77 bps before Prime Minister Michel Barnier presented the budget bill for 2025, and hit a multi-year high above 85 bps in the summer.

French credit default swaps are already trading in line with weak single A- or even triple BBB-rated swaps, below France’s current AA rating.

S&P Global Markets Intelligence data shows five-year CDS for France at 33 bps, versus 31 bps for Spain, which Moody’s rates two rungs lower. French CDS were around 24 bps prior to this summer’s election.

KEY QUOTES

I would expect a significant market reaction to Moody’s just if the agency downgraded the French rating, a move which I see as very unlikely,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

While an outlook change is possible, I don’t expect a downgrade from Moody’s, as the rating agency is very focused on debt affordability,” said Christoph Rieger, head of rates and credit research at Commerzbank.

CONTEXT

In July, Moody’s warned the outcome of France’s election was negative for the country’s credit rating. Rival agency Fitch cut France’s outlook to “negative” from “stable” in mid-October and kept its rating at AA-.

France was downgraded by rival S&P in May to AA-.

France’s 10-year bond yields were last at 3.05%, from around 3.2% in early June.

WHAT’S NEXT

Markets are waiting for the National Assembly to pass the 2025 budget, which includes 60 billion euros in spending cuts and tax rises.

Barnier’s minority government risks a no-confidence motion in pushing for parliamentary approval of the plan.

GRAPHIC

($1 = 0.9275 euros)

(Reporting by Stefano Rebaudo; Editing by Amanda Cooper and Christina Fincher)