S&P Global Ratings has placed a negative outlook on France’s creditworthiness, citing persistent concerns over government debt and political instability. This move highlights the ongoing uncertainty surrounding the country’s finances following prolonged political turmoil.

Key Factors Behind the Downgrade

According to S&P Global Ratings, the revised outlook reflects France’s rising government debt and weak political consensus in addressing its budget deficit. The firm emphasized that uncertain economic growth further complicates fiscal recovery.

Despite the negative outlook, France’s AA- rating remains unchanged, positioning it alongside the Czech Republic and Slovenia—seven notches above junk status.

France’s Budget Struggles and Government Challenges

The 2025 budget was recently adopted after a contentious parliamentary battle that led to the collapse of the government in December. The final finance bill aims to reduce the budget deficit to 5.4% of GDP in 2025, a less aggressive target than the initial 5% goal.

The French Finance Ministry called the budget a “historic turning point” in efforts to control debt. However, S&P projects GDP growth below 1% this year, further straining the fiscal outlook.

Political Instability Adds to Economic Concerns

Even with a budget in place, political uncertainty looms, as Prime Minister Francois Bayrou lacks a parliamentary majority. Upcoming debates on pension reforms, including the contested law that raised the retirement age to 64, could fuel further instability.

Meanwhile, France’s public pension system deficit is expected to widen, according to the state auditor, adding pressure to long-term fiscal planning.

Market Impact and Future Risks

The yield gap between French and German 10-year bonds, a key risk indicator, has remained between 70 to 80 basis points since President Emmanuel Macron’s snap elections in June. However, it spiked to nearly 90 basis points during last year’s market turmoil.

S&P warned that further negative action on France’s credit rating is possible if:

• The government fails to effectively reduce its budget deficit within the next two years.
• Economic growth underperforms projections over an extended period.

France’s Fiscal Future: What’s Next?

With major spending pressures, an aging population, and a fragile political landscape, France faces a challenging road to fiscal stability. Economists note that achieving meaningful budget discipline, as seen in the 1990s during preparations for the eurozone, will be difficult in today’s economic climate.

Will France successfully navigate its financial and political challenges? Stay updated with the latest insights on global markets and economic policies.