Fitch warns of soaring debt and political fragmentation in France

Fitch Ratings downgraded France’s sovereign credit rating on Friday, citing political instability and unresolved disagreements over how to address the country’s strained public finances.

The move lowers France’s rating from “AA-” to “A+,” marking its lowest level on record with a major global rating agency, according to reports in British media.

The US-based agency highlighted that France’s debt burden is expected to continue rising until 2027 unless urgent measures are taken, pointing to “a lack of a clear horizon for debt stabilisation in subsequent years” as a key factor behind the downgrade.

The downgrade comes just four days after Prime Minister François Bayrou resigned following a parliamentary confidence vote defeat over an austerity budget. Bayrou had proposed significant spending cuts to reduce the French deficit and debt. Reacting to Fitch’s announcement, he told X that France was “a country whose ‘elites’ lead it to reject the truth (and) is condemned to pay the price.”

The credit rating cut adds pressure on Bayrou’s successor, likely Prime Minister Sébastien Lecornu, who will probably head a minority government tasked with drafting next year’s budget.

Fitch noted in its statement: “The government’s defeat in a confidence vote illustrates the increased fragmentation and polarisation of domestic politics. This instability weakens the political system’s capacity to deliver substantial fiscal consolidation.” The agency also indicated it is unlikely that France will meet its previous government’s target of reducing the fiscal deficit to 3% of GDP by 2029.

Outgoing Economy Minister Eric Lombard said he had taken note of the downgrade and that Lecornu is moving forward with consultations with lawmakers to adopt a budget and restore public finances.

A downgrade typically raises the risk premium that investors demand to hold government bonds. While some financial experts suggested that the debt market had largely anticipated a downgrade, Fitch’s move could carry greater consequences, potentially prompting other rating agencies to follow suit and forcing investors bound by ratings thresholds to sell French bonds.

On Tuesday, the yield on French 10-year government bonds rose to 3.47%, approaching that of Italy, traditionally one of the eurozone’s weakest performers. Higher yields translate into increased costs for servicing public debt, which Bayrou warned is already at an “unbearable” level.

With Macron’s allies lacking an overall parliamentary majority, compromises will likely be necessary, potentially undermining any attempts to slash spending or raise taxes — putting Lecornu’s position at risk.

France’s budget deficit stood at 5.8% of GDP last year, while public debt reached 113% of GDP, far above eurozone ceilings of 3% for the deficit and 60% for debt. Fitch projects that debt will rise to 121% of GDP by 2027 if no clear stabilisation plan is implemented, noting that France’s rising indebtedness limits its ability to respond to new shocks without further deterioration of public finances.

Despite these challenges, France continues to cautiously target economic growth for 2025. The INSEE national statistics bureau reported on Thursday that GDP is projected to grow by 0.8% this year, 0.1 percentage points above the previous government’s forecast.

Rival rating agency S&P Global is expected to update its sovereign rating for France in November.

By Tamilla Hasanova