Fitch Downgrades France: Negative Outlook Raises Concerns Over Paris’ Financial Health

Fitch Lowers Outlook for France Amid Economic Concerns

Fitch has downgraded its outlook for France from “stable” to “negative,” reflecting recent decisions regarding fiscal policies and risks surrounding the stability of the newly formed government.
This judgment follows last year’s downgrade of France’s credit rating from AA to AA-, a rating shared with the United Kingdom and Belgium.

In the coming weeks, France is poised to face further rating revisions from Scope, Moody’s, and S&P, which have already lowered their assessments earlier this year.
The downgrade stems from the presentation of the Budget Law by Prime Minister Barnier’s government, which targets a €60 billion reduction in the public finances gap through cuts in spending and tax increases primarily affecting the wealthy and large corporations.

Potential Future Downgrades and Economic Instability

The rating agency indicated that if France fails to implement a medium-term fiscal consolidation plan due to political fragility and social pressures, further downgrades could occur.
The anticipated fiscal slippage for this year places France in a poorer fiscal position, leading to an expected increase in public debt to 118.5% of GDP by 2028.

This year, France’s public finances have deteriorated significantly, as fiscal revenues fell short of expectations while expenditures outpaced them, heightening the risk of a rating downgrade.
Fitch predicts a deficit of 5.4% of GDP for 2025 and 2026, expressing skepticism that the government will adhere to the EU’s 3% deficit limit by 2029.

Fragmented Politics and Fiscal Challenges

The high level of political fragmentation and a minority government complicate France’s ability to establish sustainable fiscal consolidation policies.
While Fitch anticipates that the budget law will be enacted by the end of the year, the government may need to make concessions to gain support from opposition parties.

Concerns over France’s solvency are at an all-time high, highlighting the severe fiscal challenges the country faces.
The situation escalated quickly in 2024 after weak tax revenues created a budgetary gap, exacerbated by President Emmanuel Macron’s abrupt decision to dissolve Parliament following the rise of Marine Le Pen’s right-wing party in the European elections.

Investor Reaction and Financial Responses

This political instability prompted investors to offload French bonds, driving the spread between French and German ten-year debts to nearly 80 basis points, up from under 50 at the beginning of the year.
In an effort to reassure both markets and the public, Finance Minister Antoine Armand emphasized that the 2025 budget proposal reflects the government’s commitment to realigning public finances and controlling debt.

However, the divided Parliament presents another risk to financial stability.
Without a majority backing the budget, Barnier might resort to utilizing a constitutional article to bypass a vote in the National Assembly—a maneuver that could increase the likelihood of confidence motions, potentially triggering political and financial chaos.