Fitch revises France’s outlook to ’negative’ on worsening debt dynamics

On Friday, credit ratings agency Fitch updated France's outlook to negative from stable, citing worsening fiscal conditions and political fragmentation that are hampering debt stabilization efforts. The agency highlighted weaker economic growth, higher borrowing costs, and an expanding deficit since its August review. These challenges were exacerbated by a fractured political landscape, which is making sustained fiscal consolidation more difficult to achieve.

France's economy unexpectedly contracted in the third quarter, while October inflation accelerated to its highest level since late 2023, driven by an unprecedented combination of external and internal shocks, as Economy Minister Roland Lescure described. This outlook revision adds to pressure on the government ahead of upcoming protests, highlighting the political hurdles in implementing spending cuts and deficit-reduction measures.

French 10-year yields surged to their highest since 2002 last week, reaching over 5.14%, a significant increase compared to most peers. This rise reflects heightened sensitivity to shifts in market confidence due to concerns over France's fiscal trajectory and the country's struggle to pass a budget, as well as ongoing social unrest.

The move increases the risk of a future downgrade for France, the euro zone's second-largest economy, which has already experienced a sharp rise in borrowing costs, negatively impacting its debt outlook.

Fitch notes that the emerging policy debate ahead of the presidential election has not significantly bolstered its confidence in durable deficit reduction, which could lead to debt stabilization. The agency now projects France's debt-to-GDP ratio to reach around 124% by 2028, up from 115.7% in 2025. Despite these setbacks, the large, diversified economy, strong institutions, and France's membership in the euro area continue to support its rating.

This decision follows just days after Moody's deferred a downgrade for France, maintaining its Aa3 rating with a negative outlook, citing expectations that a 2027 deficit-reduction budget will be enacted and that financing pressures and social tensions will ease in the coming months.