S&P Downgrades France's Rating to A+, Citing Political Instability with Broad Implications

An Early Decision Amid Parliamentary Chaos

S&P has moved ahead of its usual schedule to downgrade France's credit rating, citing the recent increase in motions of no confidence in Parliament as the reason for this urgency. According to the agency, these political tensions severely limit the potential progress in stabilizing public finances. The parliamentary battle, with the 2027 presidential election on the horizon, raises fears of prolonged gridlock.
S&P links the decision by Sébastien Lecornu's government to suspend pension reform to the expedited verdict. This move, seen as a political victory for the Socialist Party, symbolizes the impossibility of implementing structural reforms for S&P. For the agency, France is experiencing an unprecedented period of political instability since the creation of the Fifth Republic in 1958. Since May 2022, Emmanuel Macron has had to manage with two parliaments lacking a majority and increasing fragmentation, leading to the appointment of six prime ministers in three years. This chronic instability is becoming the primary reason for the downgrade, more than the budgetary figures alone. The agency believes that uncertainty over public finances will remain high until 2027, after the next presidential election.

Alarming Budget Forecasts Justify the Sanction

S&P's financial projections paint a concerning picture of France's budgetary trajectory. For 2025, the agency believes the deficit target set by Bercy of 5.4% of GDP will indeed be met. However, divergences appear when looking toward 2026. While the government aims for a deficit of 4.7% of GDP, S&P is skeptical about the promised budgetary efforts. This substantial difference reveals a deep distrust in the current government's ability to fulfill its commitments in a highly fragmented parliamentary context.
On the public debt front, the figures are equally concerning. While the debt stood at 112% of GDP at the end of 2024, S&P forecasts a surge to 121% by the end of 2028. This nine-point increase over four years illustrates a structural deterioration that cannot be reversed without ambitious reforms. The agency clearly does not believe in the intentions expressed by Sébastien Lecornu's government, viewing the political context as making any fiscal consolidation unrealistic. This trajectory places France in a delicate situation with its European partners and the financial markets.

What are the concrete impacts for French and foreign investors?

The downgrade to A+ significantly alters the perception of French risk in the financial markets. Investors will now have to factor in a higher risk premium when purchasing French sovereign bonds. Mechanically, this could lead to an increase in the interest rates demanded to hold French debt, thereby increasing the debt burden for the government.
Each bond issuance would then cost the public treasury more, further reducing future budgetary leeway. For institutional investors, particularly pension funds and insurers that hold a substantial amount of French debt, this downgrade necessitates a reassessment of their portfolios. Some management mandates impose minimum rating thresholds, which could force the sale of French bonds. The yield spread between French and German bonds, the well-known spread, also risks widening further. In the medium term, if no credible fiscal recovery is undertaken, further downgrades cannot be ruled out. The outlook remains stable according to S&P, but this stability is contingent on adopting a coherent budget by the end of 2025, a goal that is far from certain in the current political climate.