French credit outlook divides ratings agencies: Fitch is negative, Moody's remains stable, bond risk sees biggest drop

Ratings agency Fitch revised France’s outlook to “negative” from “stable” on Friday, warning that worsening fiscal conditions and political fragmentation are undermining prospects for debt stabilization.

The agency pointed to weaker growth, higher borrowing costs and a wider deficit since its August review, compounded by a fragmented political landscape that makes lasting fiscal consolidation difficult to achieve.

Why Fitch downgraded France’s outlook

Fitch forecast debt levels for the European Union’s second-largest economy to rise from nearly 115.7 percent of GDP in 2025 to 124 percent in 2028. In its last review in August, Fitch forecast France’s debt to reach 122.7 percent of GDP in 2028.

“Weaker growth, renewed fiscal deterioration and higher yields have increased the challenge to ensure the necessary sustained fiscal consolidation to halt the worsening trajectory of French debt,” Fitch said.

According to Fitch’s outlook, the prospects for debt reduction after the presidential elections in April-May next year were “uncertain”.

She said the political divide, with far-right and far-left candidates leading the polls, would make it difficult to agree on a “credible fiscal strategy”.

“The unfolding political debate ahead of the presidential election has not substantially boosted Fitch’s confidence in the prospects for sustained deficit reduction that could lead to debt stabilization. Large-scale protests against public services and the cost of living further complicate the social context for fiscal consolidation,” the agency said.

International investors have expressed widespread concern over France’s debt levels, which has pushed up the interest yields it pays to service the debt, which are among the highest in Europe.

The outlook revision increases pressure on the government ahead of further planned protests this weekend and underlines the political challenges of implementing spending cuts and deficit reduction measures.

French bond risk is falling

French 10-year yields hit their highest levels since 2002 last week, up more than 5.14%, and rose more sharply than most peers, reflecting greater sensitivity to shifts in market confidence amid concerns over France’s fiscal trajectory, a budget battle and social unrest.

Earlier, the national statistics office INSEE announced on Friday that the economy has not grown so far this year and has contracted between July and September.

Meanwhile, France managed to avoid another downgrade on Friday, this time from Moody’s. Moody’s left France’s rating at Aa3 with a negative outlook. A subsequent rally in markets left French bond risk poised for its biggest drop since the pandemic in 2020. The extra yield investors demand from holding 10-year French bonds, known as OAT, over safer German debt fell 13 basis points to 154 basis points on Monday, the biggest drop in six years at the close, according to Bloomberg.