France hit with debt warning after surprise S&P downgrade

France has been dealt a significant financial blow following S&P Global Ratings’ surprise decision to downgrade the country’s credit rating, which keeps pressure on its public finances and dampens hopes for how quickly it can reduce its debt.

S&P downgraded France’s long-term sovereign rating to A from AA- with a stable outlook in a surprise move. Budgetary uncertainty also remains high even after the government submitted its draft budget for 2025, the agency said.

The cut leaves France with just a single-A rating from two of the world’s three largest credit ratings agencies — after Fitch Ratings downgraded its rating in September — and underscores concerns about the trajectory of the country’s debt.

The lowering of the rating is due to a relatively slower pace of fiscal consolidation than anticipated before. Even with real (inflation-adjusted) GDP growth projected to be close to 1% in 2025, health spending, energy subsidies, and local government transfers all weigh down the mix.

France’s budget shortfall is projected to decline only gradually, from 5.4% of GDP in 2024 to 4.7% in 2025, under the government’s draft plan. Without such specific plans to rein in costs or increase revenue, the path to reduce debt would be too slow for it to stabilize, S&P said.

The stable outlook on the agency’s Bcc status reflects its opinion that a sound economy, a large domestic savings base, and a strong labor market will continue to support the country’s credit strength over the medium term. But it warned that another failure to address deficits could rekindle pressure.

Markets monitor borrowing costs

The demotion is arriving as international investors closely track the cost of borrowing for advanced economies with rapidly growing debt burdens. France, the eurozone’s second-largest economy, faces higher borrowing costs as yields remain elevated across the European Union.

Government bond yields edged higher after the news was announced, with the 10-year OAT benchmark yield reaching above 3.4% at one point on Wednesday, according to Reuters data. Analysts said the measure was unlikely to roil markets in the very short term, but could result in a rise in long-term borrowing costs if investor confidence wanes.

S&P’s action, said François Doucet, an economist at Banque Palatine, highlighted how debt dynamics, rather than growth, had come to the fore. He said that the downgrade was a warning to policymakers that running high deficits while interest rates were moving up could present longer-term risks.

The French Treasury stated that it was not deviating from its fiscal roadmap and that the country still maintained a solid investment-grade credit rating. It aims to reduce the deficit to below 3% of national output by 2029, in line with European fiscal rules, according to Roland Lescure, its finance minister.

France maintains a stable economic outlook

France enjoys a stable economy, and the perception of private individuals and business people also speaks in its favour. Global headwinds have impacted France’s economy, but it is better positioned than some of its peers due to a relatively broad industrial base and solid household consumption. Unemployment has remained near historically low levels, at 7.3%, and inflation has eased to 2.4%, its lowest level since 2021.

The downside is that public spending was high and government debt was elevated due to the costs of the energy transition, defense expenditures, and social support programs. Those numbers have enormous ramifications not just for how the country functions in ordinary times, but far more when disaster strikes.

Economists estimate that France allocates approximately 57% of its economic output to the government, a share that is among the highest in the Organization for Economic Co-operation and Development (OECD), a group of developed countries.

Still, despite these pressures, many analysts say there is no imminent danger to France’s capacity to pay its debts. The downgrade itself, in their opinion, was a signal that fiscal correction should be accelerated — not a warning of an imminent crisis.

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