This week has opened with some sobering news for La Belle France as late on Friday we were told this.
Fitch Ratings – Frankfurt am Main – 12 Sep 2025: FitchRatings has downgraded France’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘A+’ from ‘AA-‘. The Outlook is Stable.
This is hardly a surprise as we have been watching the issues build and Ratings Agencies are always in the van rather than the lead. So the impact that the media looks for has in fact been in play for some time. It also affects the political class and government which gets a 24 hour warning. So for example the ECB and its French President Christine Lagarde is likely to have expected this at its meeting last week but did not explicitly know. Although she was asked last Thursday.
On your second question, I’m not going to comment on individual countries.
She later went on to talk about Bulgaria in a typical contradiction.Plus this was her on September 1st.
ECB’S LAGARDE SAYS I AM LOOKING VERY ATTENTIVELY AT FRENCH BOND SPREADS SITUATION
Fortunately for her no-one pressed this development from last Tuesday.
YEEEEEEEEEEES WE’VE DONE IIIIIIIT
CONGRATS FOLKS
France 10Y yield is above Italian 10Y yield for the first time since the Euro was introduced. (@jeuasommenulle )
That was more of a technical factor as the benchmark used by Bloomberg changed but the reality is that the yields are now so close such things matter. Although France was number one in the Euro area it was not in an area she wanted.
The Problems
National Debt
This caught my eye as the habit in the Euro area is to forecast falling debt ratios over time. We saw this in Greece and Italy for example. That did not happen but the forecasts buy time. However Fitch has now taken a different tack.
High and Rising Debt Ratio: France’s general government debt ratio will continue to rise, reflecting persistent primary fiscal deficits. Fitch projects debt to increase to 121% of GDP in 2027 from 113.2% in 2024, without a clear horizon for debt stabilisation in subsequent years.
I know that some of you have been following me for many years and thus may recall the way the Euro area used a level of 120% of GDP as a benchmark in the Greek crisis. Then got egg on its face as Italy and Portugal cruised through it. Well if Fitch is right France is on its way through a level that the Euro area used to consider a big deal.
There is also an interesting reference to a point I have made many times as we are taken back to pre Covid times showing rather than any form of austerity the fiscal party band carried on playing.
France’s 2024 debt ratio, already double the ‘A’ category median, was 15pp above its 2019 level and is now the third highest among sovereigns in the ‘A’ and ‘AA’ rating categories. France’s rising public indebtedness constrains the capacity to respond to new shocks without further deterioration of public finances.
As “shocks” are more frequent these days that does rather beg the question what would happen then?
Does this matter?
A debt to GDP ratio is flawed in the sense of comparing a stock with a flow. But as followers of my work will be aware a major factor in play here is lack of economic growth which looks set to continue.
Modest Growth Outlook: Fitch’s real GDP forecasts remain unchanged. We project real GDP growth of 0.6% in 2025, 0.9% in 2026 and 1.2% in 2027, reflecting low trend growth we estimate at 1.1%.
Putting it another way if you have Italian growth rates it is no surprise if you also have Italian style debt problems.
Also I note that the Fitch announcement skips an area I consider to be important which is debt costs. France has an average bond maturity of just over 8 years and that yield is 3.15%, So a back of the envelope calculation points to be on course to paying around 3.8% of its GDP in debt costs.
Thus as we stand the economic growth to debt costs trajectory is unfavourable.
Fiscal Position
This brings us to an area which has frustrated other Euro area members and particularly the Greeks over time. Back to ECB President Lagarde from last Thursdays press conference.
There is also a set of rules – that is the fiscal governance, the fiscal framework, the internal rules of the European countries – and the Member States have to adhere to it and to deliver against it.
Here is what France has done according to Fitch.
Weak Fiscal Record: France has a weak record of fiscal consolidation and compliance with EU fiscal rules. There have been past periods of fiscal tightening, but the headline fiscal deficit has exceeded 3% of GDP in all but three of the past 20 years, and there has not been a primary fiscal surplus since 2001.
France has ignored the rules its leaders have told others to observe and over the years ECB President Lagarde has frequently been a headline act in this. Indeed if we look at this year we see that there is little prospect of change.
High 2025 Deficit: The 2025 budget targets a fiscal adjustment of 0.7% of GDP, of which more than half derives from temporary revenue-raising measures, including exceptional levies on large corporations and high net-worth individuals. Fitch projects a 2025 fiscal deficit of 5.5% of GDP, close to the government’s 5.4% target, and down from an outcome of 5.8% of GDP in 2024.
The recent attempt to apply a further brake saw the government fall. Whilst President Macron can continue to select replacements from his political mates the problem is that they cannot get an austerity programme through the present parliament. Plus the protests will further weaken economic growth.
Also President Macron has promised to boost defence spending.
French Corporates can borrow more cheaply than their government
The Financial Times has pointed out this.
“Yields on the bonds of groups including L’Oréal, Airbus and Axa have sunk below those on French government debt of similar maturity in recent weeks, according to data compiled by Goldman Sachs, in a sign that investors may see them as a safer bet.”
This poses a real question with around 80 companies now considered a better bet than their government. Frankly who can blame them? It does rather beg a question for the concept of sovereign bonds being “risk-free” as plainly markets do not agree and also the allied idea of a safe haven.
Comment
This rolls straight into my theme of western political classes being fiscally incontinent and running fiscal deficits even after the Covid splurge. Then we see the ECB and Bank of France now looking to dispose of their large French government bond portfolios or what is called QT. Unlike in the UK they are not actively selling but are letting bonds mature without replacement. The point is that the political class has remained in an era where many French bond yields were negative and yes I do mean it was paid to borrow. Whereas now it is expensive in post credit crunch terms.
France is not alone in this but its obvious political problems give it little room to manoeuvre. Also there is this.
“French pensioners now have higher incomes than working-age adults” (@jburnmurdoch)
Let me finish with a positive as yesterday I watched Jimmy Gressier win the men’s 10,000 meters at the World Athletics Championships. So congratulations to him.
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