By Marc Jones
LONDON (Reuters) -The outcome of France's parliamentary election is negative for the country's credit rating, Moody's (NYSE:MCO) has warned, as a grand coalition would make decision-making and the task of bringing its debt under control more difficult.
France is facing complex negotiations to form a government after a left-wing surge in elections on Sunday blocked Marine Le Pen's quest to bring the far right to power.
Possibilities include the left forming a minority government - which would be at the mercy of a no confidence vote from rivals unless they reach deals - and the cobbling together of an unwieldy coalition of parties with almost no common ground.
"In light of the constraints that any future government faces, we are unlikely to see expenditure-based fiscal consolidation in 2025," Moody's said in a note, echoing many of the concerns S&P Global voiced on Monday.
France is also unlikely to be able to push through further tax hikes, given that its tax-to-GDP ratio is already the highest in the OECD, Moody's added.
"Hence, the fiscal implications of the election outcome are credit negative," said the ratings agency, whose current Aa2 "stable" outlook rating on France is a notch higher than both S&P and Fitch.
France's spending trajectory means its general government deficit is not likely to drop below 4% of GDP until 2027, by which point its near 110% debt-to-GDP ratio will have ballooned a few more percentage points.
Moody's pinpointed a trio of triggers for a rating change.
* The outlook would move to negative if, for example, the fiscal and debt numbers looked likely to be materially worse than previously expected, in particular its interest payments relative to revenue and GDP.
* There was a weakening commitment to fiscal consolidation.
* There was a reversal of the labour market liberalisation and pension reforms of the last seven years that Moody's thought would materially dampen the country's medium-term growth potential and/or fiscal trajectory.
"The current unprecedented circumstances will test French institutions and policy effectiveness," Moody's said.