S&P Downgrades France's Sovereign Credit Rating Amid Fiscal Challenges

France's sovereign credit rating has been downgraded by one notch by global credit ratings agency S&P Global Ratings, raising concerns about the country's fiscal trajectory. This decision, which reflects skepticism about the government’s ability to address its mounting debt, adds pressure to France's growing fiscal burden and signals a critical juncture in its economic outlook.

On November 17, S&P announced that France’s long-term sovereign credit rating was lowered from “AA-” to “A+” while maintaining a “stable” outlook. The downgrade underscores ongoing fiscal challenges despite the submission of the 2025 budget. Consequently, France now holds an “A” grade rating from S&P and Fitch, two of the three major credit agencies.

Slower Fiscal Consolidation and Mounting Fiscal Pressures

The downgrade follows concerns over France’s sluggish fiscal consolidation efforts. The French government projects a gradual reduction in its fiscal deficit, with plans to decrease it from 5.4% of GDP in 2024 to 4.7% in 2025. However, S&P flagged the slow pace of these efforts, emphasizing mounting expenditure from healthcare costs, energy subsidies, and transfers to local governments as contributing factors in the fiscal strain.

S&P criticized the lack of definitive strategies for reducing cost or increasing revenue streams. This issue is compounded by rising borrowing costs across Europe, with sovereign bond yields trending upwards. France, as the euro area’s second-largest economy, faces heightened borrowing costs—a concern further exacerbated by its high public expenditure levels. Following the downgrade announcement, yields on France’s 10-year government bonds temporarily exceeded 3.4%. While short-term market reactions appeared muted, some analysts caution that prolonged investor skepticism could lead to persistently higher borrowing costs, negatively impacting debt servicing in the future.

Economic Resilience Provides a Buffer

Despite fiscal challenges, France’s economy demonstrates resilience within the eurozone. S&P highlighted that the country’s robust industrial base, strong household consumption, and low unemployment rate of 7.3% indicate economic stability. Inflation has also moderated, declining to 2.4%, which supports credit stability and helps preserve investor confidence in the medium term.

S&P emphasized that these solid economic fundamentals justify its “stable” outlook on France's credit rating. High levels of household savings, alongside a stable labor market, continue to bolster France’s position within Europe, preventing the downgrade from triggering immediate financial instability.

Experts contend that S&P’s move is less a signal of economic turmoil and more a prompt for France to address its underlying fiscal challenges. François Doucet, an economist at Palatine Bank, noted that the main concern lies in escalating risks associated with debt management. “Maintaining high deficits while facing rising global interest rates could evolve into a major threat to long-term economic stability,” Doucet warned.

Government Response and Future Fiscal Plans

In response to the downgrade, French officials reaffirmed their commitment to fiscal reforms. The Ministry of Finance emphasized that France continues to hold a solid investment-grade rating and dismissed fears of an economic crisis. Finance Minister Roland Lescure reiterated the government’s pledge to shrink the fiscal deficit to below 3% of GDP by 2029, aligning with European Union rules.

France’s government remains determined to strike a balance between fostering economic growth and maintaining fiscal discipline. While its strong economic foundations offer a safety net, economists argue that proactive measures to address fiscal gaps are essential to avoiding potential risks in the long term.

Conclusion

S&P’s downgrade serves as an important reminder for France to accelerate efforts toward fiscal reforms and debt reduction. While its resilient economy and stable credit outlook provide some reassurance, the growing fiscal pressures—from rising expenses to elevated borrowing costs—underscore the need for decisive strategies to restructure its debt and balance its books. France must navigate these challenges carefully to sustain investor confidence, safeguard its economic standing in the eurozone, and meet long-term fiscal objectives.