France's Sovereign Rating Slips To Record Low Amid Fiscal Strains - Arabian Post

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Fitch Ratings has cut France's long-term issuer default rating from AA- to A+, marking the lowest rating ever assigned to the country by a major agency. The outlook is stable, but the downgrade reflects mounting concerns over fiscal deficits, political instability, and France's diminishing ability to rein in a swelling public debt.

The agency flagged France's deficit at about 5.8 per cent of GDP for 2024, far above the European Union's 3 per cent ceiling, and said that without clear policy measures, deficit reduction is unlikely to align with targets set for 2029. Debt as a share of GDP stood at more than 113 per cent in 2024, and Fitch projected it could keep rising if stabilisation remains lacking.

Political turbulence plays a central role in Fitch's assessment: the government of François Bayrou was toppled by a no-confidence vote over his proposed €44 billion budget cuts. His replacement, Prime Minister Sébastien Lecornu, faces the formidable task of navigating a fragmented parliament without a clear majority.

Markets have responded uneasily. French 10-year bond yields have climbed, dragging closer to those of Italy, long viewed as a benchmark for elevated euro-area sovereign risk. The spread between French bonds and German Bunds has widened. Investors are watching closely whether the downgrade might force sales of French debt by funds bound by rating thresholds.

On the policy front, Lecornu is under pressure to deliver a credible 2026 budget proposal. He has begun consultations with lawmakers across the political spectrum to win support. Some observers believe he will need to scale back the austerity and deficit targets proposed by his predecessor.

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Fitch noted strengths that could help buffer France: its large, diversified economy; its high-income status; and a sound banking system. But those positives may be insufficient if political gridlock prevents meaningful fiscal consolidation.

Other rating agencies are watching closely. Standard & Poor's maintains France's AA- rating with a negative outlook, warning that its next review in November could lead to further downgrades if deficit reduction fails.

France also remains subject to EU rules on deficits and debt. Under the EU's excessive deficit procedure, states are required to keep their deficit below 3 per cent of GDP and debt below 60 per cent-benchmarks France has long exceeded.

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