Credit ratings agency Moody's downgraded France's outlook to "negative" on Friday, opening the door to a potential credit rating cut as it cited concerns over the country's finances, particularly the country's debt and widening budget deficits.
The shift reflects an "increasing risk that France's government will be unlikely to implement measures that would prevent sustained wider-than-expected budget deficits and a deterioration in debt affordability," said Moody's Ratings.
Accordingly, it changed France's outlook from "stable" to "negative."
In the same statement, the agency affirmed France's credit rating at "Aa2," saying this was supported by its "large, wealthy and diversified economy."
In lowering the outlook, Moody's said the fiscal deterioration it has seen is "beyond our expectations and stands in contrast with governments in similarly rated countries that are tending to consolidate their public finances."
France's new Finance Minister Antoine Armand noted the decision on Friday but maintained that the country can carry out "far-reaching reforms."
He said some have already produced results and added that the country has economic strength while vowing to restore its public finances.
On Thursday, Armand told Agence France-Presse (AFP) that France must take "credible" steps to tackle its high deficit.
For now, Moody's said risks to France's credit profile are heightened by its political and institutional environment.
It noted the situation is "not conducive to coalescing on policy measures that will deliver sustained improvements in the budget balance."
"As a result, budget management is weaker than we had previously assessed," it added.
New French Prime Minister Michel Barnier is hoping to bring the public sector deficit to below 5% of gross domestic product (GDP) next year from an expected 6.1% in 2024.
The government hopes that in 2029 it will drop to below 3%, the agreed deficit ceiling for EU members.
This month, he unveiled a deficit-slashing budget.
France's annual budget debate has often triggered no-confidence motions and Barnier's plan sparked vocal opposition even before its full details were known.
France's debt is expected to rise to close to 115% of GDP next year, compared to an EU debt target of 60%.
In absolute terms, France's debt stood at over 3.2 trillion euros ($3.45 trillion), having risen by about one trillion since President Emmanuel Macron took power in 2017.
Earlier this month, Fitch Ratings also affirmed France's rating at "AA-" but revised its outlook from "stable" to "negative," pointing to heightened fiscal policy risks.
On Thursday, Armand said, "the work we'll be doing over the coming months will be to monitor and fine-tune our public spending" to make savings.
Budget Minister Laurent Saint-Martin added that the strength of the French economy continued to be recognized, although noting that the country should pursue a structural reform agenda.
