S&P Global Ratings Downgrade France’s Sovereign Credit Score
In a move that surprised bond markets, S&P Global Ratings (Standard & Poor’s), one of the world’s leading credit agencies, announced on Friday, 20th October, that it had downgraded France’s sovereign credit rating from AA- to A+. S&P had originally been expected to review France’s rating next month, but brought its decision forward, citing growing fiscal concerns, particularly the suspension of the government’s controversial pension reform by parliament. Last week, the government narrowly survived a no-confidence vote after agreeing to opposition demands to halt President Macron’s pension changes, a political compromise that, according to analysts, preserved the government’s stability at the expense of fiscal reform.
France has now lost two of its AA- ratings in quick succession, with both Fitch and S&P lowering their assessments. Moody’s is scheduled to review France’s credit score of Aa3 (the lowest in the double-A category) on Friday 24th October. Experts warn that French bonds could become more vulnerable as downgrades come faster than markets anticipated. Following S&P’s decision, French government bonds came under pressure, with yields on the 10-year bond rising by three basis points to 3.39%, while German 10-year yields increased by one point. A key gauge of risk — *the French-German 10-year bond spread has widened sharply, nearing 90 basis points earlier this month, up from just over 50 basis points before Macron’s snap legislative election in 2024.
*French-German 10-Year Bond Spread – this is an important indicator of market risk, comparing France’s borrowing costs to those of Germany, the Eurozone’s benchmark “safe” borrower. A widening spread indicates that investors are demanding higher returns for holding French bonds, reflecting increased concern about France’s fiscal health or political uncertainty.
The hung parliament resulting from President Macron’s snap elections on 30th June and 7th July 2024 has created a political stalemate that has driven up bond yields (now among the highest in the Eurozone). These pressures have been further exacerbated by S&P’s downgrade. France’s public debt currently stands at around 113% of GDP, with S&P forecasting it could rise to 121% by 2028. The agency warned that the country’s economic outlook (the Eurozone’s second-largest economy) remains uncertain ahead of what could be France’s most pivotal election in decades in 2027.
Another challenge for French bonds is that, with the rating now below the AA threshold, some funds bound by “ultra-strict investment criteria” may be forced to sell their holdings, pushing yields higher. However, analysts note that most funds will likely continue to hold French government debt. Some fund managers, anticipating the downgrade, have already amended their internal rules, reportedly in response to client demand, to allow holdings of A-rated French securities.
Overall, analysts warn that France faces significant fiscal challenges, including a large public deficit and mounting national debt. Two major rating downgrades in quick succession highlight investor concern about rising borrowing costs. While inflation remains low and France retains economic strengths in services, tourism, and technology, a lack of political consensus on structural reforms and budget discipline is hampering progress. The draft 2026 budget, which includes tax rises and a surtax on large corporations, faces fierce opposition both from parliament and the public, underlining how difficult it will be for the government to stabilise the nation’s finances.
