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Investing.com -- France’s fiscal outlook is under renewed scrutiny as political turbulence collides with deteriorating public finances. Fitch’s downgrade of the country’s sovereign rating from “AA-” to “A+” marked the first cut among the three major agencies, with Moody’s and S&P expected to follow in the coming months.
The move comes against the backdrop of government instability. Prime Minister François Bayrou lost a no-confidence vote in parliament, leading to his resignation.
President Emmanuel Macron has since appointed Sébastien Lecornu, who now faces the task of presenting the 2026 budget without a parliamentary majority. This fragile political setting complicates efforts to push through spending cuts or structural reforms.
Budget projections highlight the scale of the challenge. Without new measures, spending would rise by €51.1 billion next year, pushing the deficit to 6.1% of GDP, far above the 4.6% target submitted to Brussels.
Debt is forecast to climb from 113% of GDP in 2024 to 125.3% by 2029. Analysts stress that these pressures are not merely cyclical, pointing to structural burdens such as social and healthcare outlays of 32.3% of GDP in 2023, well above the EU average.
With growth potential stuck near 1.2%, financing such obligations is increasingly difficult.
Taxation offers little room for maneuver, with France’s tax-to-GDP ratio already sitting at 45.6%, the highest in the EU. As a result, fiscal consolidation depends almost entirely on spending restraint.
Yet political instability is reducing the likelihood of ambitious reforms. “If these discussions are successful and the Prime Minister manages to keep his position, it will probably be at the cost of less rigorous fiscal consolidation,” ING economists said in a note.
Markets, however, have taken the downgrade in stride. The 10-year French government bond spread over Bunds briefly widened but soon reversed, stabilizing near 80 basis points.
French spreads now trade broadly in line with Italy’s, suggesting investors had already priced in downgrades.
“The French political and fiscal problems so far have limited spill-over into other markets as well. That it remains an idiosyncratic story was underscored over the weekend by Spain and Portugal seeing rating upgrades at the same time that France lost its first AA rating,” the economists said.
“In fact, market pricing has for some time reflected expectations of a reordering in European government bond space,” they added.
Corporate bonds have also remained resilient, with names like Schneider Electric, Danone, and L’Oréal in some cases trading through French sovereign debt levels.
Still, confidence in France’s ability to reduce its deficit below 3% by 2029 is waning. The repeated turnover of governments since 2024 and the shelving of earlier savings plans underscore the difficulty of enforcing discipline.
With unions preparing new protests and coalition talks dragging on, uncertainty is set to linger until at least the 2027 presidential elections.