Fitch downgrades France's rating due to budgetary difficulties and political instability

One less letter. Without waiting to find out whether the new Prime Minister, Sébastien Lecornu, will manage to reach a non-censorship agreement to push through the 2026 budget , the American rating agency Fitch has downgraded France's debt rating. In a decision made public this Friday evening, September 12, it chose to remove an A rating. Moving from AA- to A+, France leaves the group of countries whose default risk is considered "very low" to join the group whose default risk is "low" , which already includes Belgium, Malta, and Estonia.

The last time this agency moved France's rating was in 2013, when it moved it out of the triple-A group of countries (the highest rating). It is the first of the three major international agencies (along with Moody's and Standard & Poor's) to place France in this category.

This relegation is motivated by the country's budgetary difficulties and the ongoing political instability, even though, this time, a Prime Minister was appointed quickly after the departure of François Bayrou. "The fall of the government during a confidence vote illustrates the fragmentation and growing polarization of domestic politics," Fitch points out in a press release. "This instability weakens the capacity of the political system to implement large-scale fiscal consolidation," adds the American agency. "Without a clear prospect of stabilizing the debt in the coming years," it also considers it unlikely that the public deficit will be brought below 3% of GDP by 2029, as the outgoing government had hoped.

Analysis

Upon the announcement of this downgrade of France's rating, the outgoing Minister of Economy and Finance, Eric Lombard, said he "took note" of Fitch's decision, "despite the strength of the French economy." "The new Prime Minister has already initiated consultations with the political forces represented in Parliament with a view to adopting a budget for the Nation and continuing efforts to restore our public finances," he added.

In March, a few weeks after the government finally succeeded in enacting the 2025 budget, the same agency left France's rating unchanged , having six months earlier given it a negative outlook (the step before the change in category). Fitch then praised its "large and diversified" economy and its "strong and effective institutions," but criticized its high deficit, its instability linked to the lack of a majority in the National Assembly, and the weakness of business and household confidence.

Last week, before the fall of the Bayrou government, Fitch analysts met with Eric Lombard. In contrast to the catastrophic rhetoric about France's economic and budgetary situation delivered for weeks by the centrist and some of his ministers, the time was ripe to highlight several positive aspects.

First, budget execution, with a public deficit target enshrined in this year's finance law (5.4% of GDP after 5.8% last year) on track to be met. If this is indeed the case, it would be the first time since 2022 that the country has managed to reduce its public deficit. Second, the resilience of economic activity, confirmed Thursday by INSEE , which slightly raised its growth forecast for the year (expected at 0.8% compared to 0.6% previously). Finally, the removal of some uncertainty, with the announcement in July of an agreement between the United States and Europe on customs duties.

The fact remains that France still has a high deficit; last year, after two years of public accounts slippage, it was the highest in the Eurozone, and a significant debt of 114% of GDP in the first quarter.

It remains to be seen what the effects of this downgrade will be. Generally, the agencies only confirm movements that have already taken place. "They add fuel to the fire by accentuating trends more than they create them. Studies also show that they follow market behavior without anticipating it," Anne-Laure Delatte explained to Libération in 2023. In this case, the rates at which France borrows over ten years have already appreciated in recent weeks.

However, its ability to refinance itself is not threatened: during an issue on September 4, it largely found buyers for the €11 billion of securities placed on the markets. The last downgrade by Moody's in December 2024 had little impact on rates.

The other two agencies, Moody's and Standard & Poor's, will deliver their ratings on France's debt on October 24 and November 28 respectively.

Updated at 11:17 p.m., with the addition of statements from Fitch and Minister Eric Lombard.