S&P Hands Crisis-Prone France Surprise Downgrade

S&P Surprises with Downgrade of France Amid Political Instability

Impact of Downgrade on France's Economy

PARIS (Reuters) -S&P Global downgraded France's rating a notch on Friday in a surprise update on the euro zone's second-biggest economy, warning that political instability put the government's efforts to repair its finances at risk.

Political Factors Influencing the Downgrade

Credit ratings agencies rarely downgrade outside of regulated schedules for updates, but S&P said France's cut to A+/A-1' from 'AA-/A-1+' was merited after a high-tension week in which Prime Minister Sebastien Lecornu pledged to suspend a deeply unpopular 2023 pension reform and faced two votes of no-confidence.

Economic Implications and Future Outlook

"We expect policy uncertainty will affect the French economy by dragging on investment activity and private consumption, and therefore on economic growth," the credit ratings agency said in a statement.

Government Debt Projections

Lecornu survived the two no-confidence votes in parliament on Thursday, but the reprieve for his days-old government came at the price of sacrificing President Emmanuel Macron's signature pension reform in order to win support from Socialist lawmakers.

Budgetary Challenges Ahead

Any respite will prove short-lived as Lecornu's 2026 budget, which he also presented this week, faces a rough ride in France's fractured parliament when they begin reviewing the bill on Monday.

In reaction to the downgrade, Finance Minister Roland Lescure said that it was now "the collective responsibility of the government and parliament" to pass a budget by year-end, ensuring the fiscal deficit is on a path to the European Union ceiling of 3% of GDP by 2029.

According to S&P, the passage of a budget by year-end would help give greater clarity on how France will manage its rising debt burden, which it projected would climb to 121% of GDP by 2028 versus 112% of GDP at end-2024.

"Nevertheless, in our view, uncertainty on public finances remains elevated ahead of the 2027 presidential elections," S&P said.

The agency revised the country's outlook from 'negative', saying the 'stable' outlook balances rising government debt and weak political consensus on the pace of budgetary consolidation against France's credit strengths. 

(Reporting by Nishara K.P in Bengaluru and Leigh Thomas in Paris; Editing by Shailesh Kuber and Rosalba O'Brien)