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Ratings agency Fitch changed its outlook on France to negative in an unanticipated move that came shortly after data showed the economy contracted unexpectedly in the third quarter.
Fitch announced Friday evening that it had changed its outlook on France from stable to negative, a decision taken outside of its usual update schedule, while maintaining the country’s A+ rating. Its announcement noted “weaker growth, higher borrowing costs and a larger deficit” since the rating was last revised in August.
“This worsens debt dynamics from an already weak starting point,” Fitch said in a statement. “Persistent political fragmentation and a difficult social context increase the difficulty of achieving sustainable budgetary consolidation. »
Fitch is now the most pessimistic of the three major rating agencies. S&P Global Ratings also rates France’s creditworthiness at A+, although it has a stable outlook. Last week, Moody’s surprised investors by maintaining its credit rating at Aa3 with a negative outlook, a notch above its competitors.
The French economy, the second largest in the euro zone, shrank 0.1% in the third quarter due to a sharp rise in borrowing costs, high energy prices and growing political instability, the ECB said on Friday. The deterioration surprised economists, who had expected growth to remain positive, and increased pressure on the government to adopt a deficit-reducing budget for 2027 in the coming months.
“This (Fitch) assessment confirms the absolute need to adopt a responsible budget by the end of the year, aimed at restoring public finances by reducing our deficit to 5 percent,” said Finance Minister Roland Lescure, adding that the government is “determined to continue on the path of budgetary consolidation.”
Investors are increasingly concerned about France’s ability to manage its growing debt, which is approaching 120 percent of GDP, six months before tense presidential elections in which the far right leads the polls. Yields on benchmark 10-year sovereign bonds are hovering around 5 percent, while the gap over German yields – a key indicator of political tensions – has widened to levels not seen since the 2011 euro zone sovereign debt crisis.
Weeks of protests over education funding and the cost of living are expected to continue this weekend, testing the government’s resolve not to return to its usual method of calming social unrest by increasing spending.
Marches are planned in cities across France later Saturday, with authorities on high alert after protests on October 17 degenerated into widespread chaos and looting. Last weekend’s protests were largely peaceful, with a strong police presence.
“Much government spending is politically difficult to reduce, while the already high tax burden leaves little room for additional measures to raise revenue,” Fitch wrote.
However, it notes that the French economy “remains supported by a large, rich and diversified economy, strong institutions, its membership of the euro zone and a resilient banking sector.”
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