S&P cuts France’s credit rating to A+ over political instability risking deficit

S&P Global downgraded France's credit rating from AA to A+ due to concerns that political instability will impede the government's efforts to significantly reduce its deficit. The agency anticipates slower budgetary consolidation than previously expected, despite the likelihood of meeting the 2025 deficit target. In response, French Finance Minister Roland Lescure reaffirmed the government's commitment to achieving its deficit targets, including a 5.4% of GDP target for 2025 and a plan to reach below 3% by 2029, emphasizing the need for parliamentary support.

Analysis

S&P Global downgraded France's sovereign credit rating from AA to A+, citing elevated political instability as a key risk to the government's fiscal consolidation efforts. This unexpected move reflects concerns that the divided parliament will impede significant deficit reduction, despite the eurozone's second-largest economy. The downgrade signals a pessimistic outlook on France's ability to manage its public finances effectively in the medium term.

S&P projects France will likely meet its 2025 general government budget deficit target of 5.4% of GDP, but anticipates a slower budgetary consolidation trajectory beyond that without substantial new measures. This assessment is underpinned by the political challenges faced by President Macron, whose centrist party lacks a parliamentary majority, hindering spending cut initiatives. The recent backtracking on pension reform by Prime Minister Lecornu further exemplifies the difficulty in implementing fiscal reforms.

In response, Finance Minister Roland Lescure reaffirmed the government's commitment to the 2025 deficit target and highlighted a draft 2026 budget aiming for a 4.7% of GDP deficit, with a long-term goal of below 3% by 2029. However, S&P's action underscores the critical need for collective government and parliamentary responsibility to adopt and implement these budgets, a task complicated by the current political landscape. The market impact is significant, reflecting increased perceived risk.

Key Decisions for Investors

• Closely monitor French government bond yields and spreads for widening, indicating increased fiscal risk and potential market repricing.
• Re-evaluate exposure to French sovereign debt and related financial instruments, anticipating potential volatility and credit risk adjustments.
• Watch for concrete legislative progress on fiscal reforms and the government's ability to secure parliamentary support for budget measures, as this will be key to future rating stability.