Fitch Downgrades Crisis-Strained France

Fitch downgrades crisis-strained France

Impact of Fitch's Downgrade on France

By Leigh Thomas

Political Implications for Prime Minister Lecornu

PARIS (Reuters) - Credit rating agency Fitch downgraded France's sovereign credit score on Friday to the country's lowest level on record, stripping the euro zone's second-largest economy of its AA- status as it grapples with political crisis and ballooning debt.

Market Reactions and Investor Concerns

The move, bringing Fitch's score to A+, heaps pressure on Prime Minister Sebastien Lecornu just days into the job as he scrambles to form a cabinet and draft a 2026 budget that can pass a deeply divided parliament.

Future Outlook for French Debt

The rating, the lowest on record for a major credit rating agency, has a stable outlook for future moves, Fitch said, attributing its cut to the lack of "a clear horizon for debt stabilisation in subsequent years".

The downgrade was already priced into markets, analysts said. But the timing of the move is awkward for France, and underlines growing investor concerns over its ability to rein in its budget deficit - now the highest in the euro zone.

President Emmanuel Macron this week tapped Lecornu, a conservative loyalist, to form a government after lawmakers ousted veteran centrist François Bayrou in a confidence vote over his plans for a 44 billion euro ($52 billion) budget squeeze.

Lecornu became Macron's fifth prime minister in less than two years, and faces a near-impossible task to pass a slimmed-down budget through parliament - ordeals that led to the defenestration of France's last two prime ministers.

"This instability weakens the political system's capacity to deliver substantial fiscal consolidation," Fitch said in a statement. 

Finance Minister Eric Lombard said he had taken note of Fitch's move and that Lecornu was pushing ahead with consultations with lawmakers to get a budget adopted and restore the public finances.

Fitch's downgrade to an A+ score is more consequential than recent downgrades as it could presage peers to follow suit, potentially leading to forced selling of French bonds by investors bound by ratings thresholds.

French debt has come under pressure since Bayrou called the confidence vote last month, driving borrowing costs close to those of Italy, which carries the euro zone's second highest debt burden and a much lower credit rating.

With bond markets watching closely, Lecornu must find ways to shrink the budget deficit next year from an estimated 5.4% of GDP, though his plan will likely be less ambitious than Bayrou's 4.6% target. His draft budget is due to be sent to parliament by Oct. 7, though in a pinch he could put it off to Oct. 13.

To win sufficient parliamentary support, Lecornu is expected to make concessions to the Socialists, including higher taxes on the wealthy and softening Macron's hard-won 2023 retirement reform. But he risks alienating lawmakers in Macron's own party and the conservative Republicans if he goes too far.

France's downgrade to A+ is unlikely to pressure its major banks, with BNP Paribas and Credit Agricole already rated A+ and Societe Generale a notch lower by Fitch.

($1 = 0.8532 euros)

(Reporting by Aatrayee Chatterjee in Bengaluru and Leigh Thomas in Paris, additional reporting by Yoruk Bahceli in London; Editing by Alan Barona and Alexandra Hudson)