Fitch "shows mercy" by maintaining France's A+ rating, but warns that out-of-control deficits will lead to a downgrade.

Fitch Ratings recently announced that it is maintaining France's sovereign credit rating at "A+" with a "stable" outlook, despite the agency reiterating its warning that the persistent widening of the fiscal deficit and the continuous rise in public debt amid escalating political uncertainty could trigger a downgrade in the future. As the second-largest economy in the Eurozone, France has temporarily avoided a downgrade this time. Fitch also stated that the current rating assessment remains inclined to maintain the existing credit level. Currently, France's rating is six notches above "junk" status and is at the same level as countries like Belgium and Slovenia. In its statement, Fitch pointed out: "If France fails to make substantial progress in reducing the deficit, for example, hindered by ongoing political fragmentation, the rating outlook could be adjusted to 'negative'. If government debt rises significantly further, it could trigger a downgrade." Although the market generally expected the rating to remain unchanged, Fitch's decision provides a certain degree of breathing space for President Macron. Currently, France's public finances are facing dual pressures from rising global bond yields and a domestic political stalemate, with external scrutiny intensifying. Looking back a year ago, Fitch had downgraded France's rating at that time, warning that rising debt would weaken its capacity to respond to new shocks. Since then, the war in Iran has further pushed up inflation, dragging down economic growth, and the French economy has been teetering on the brink of recession. The French government has acknowledged that the current macro environment makes it difficult to achieve its goal of narrowing the deficit ratio from 5.1% of economic output last year to 5%. Meanwhile, parliamentary tug-of-war surrounding next year's budget is about to unfold, further complicating the fiscal situation. Over the past two years, the fragmented National Assembly has repeatedly overthrown the Prime Minister due to fiscal plans, and with only eight months remaining before the presidential election, the likelihood of the minority government reaching a compromise is increasingly slim. Recently, a sell-off in the global bond market has driven France's borrowing costs significantly higher. France's vulnerabilities on the political and fiscal fronts make it particularly sensitive, with the yield spread on its 10-year government bonds over those of Germany a key indicator of country-specific risk climbing to about 85 basis points, just shy of the highest closing level since 2012. Fitch stated: "We believe that the 2027 presidential elections and the subsequent legislative elections will be important variables that could influence France's policy direction and fiscal outlook. Our baseline assumption is that political fragmentation will persist after the elections, continuing to constrain the deficit reduction process." Fitch forecasts that France's fiscal balance will not improve further, predicting that the deficit as a share of economic output will be 5.2% in 2026, 5.5% in 2027, and 5.2% in 2028. These forecasts reflect a deterioration from previous assessments, mainly due to factors such as slow economic growth, rising debt servicing costs, and increased defense spending. Fitch emphasized: "France's high fiscal deficit and heavy debt remain the main factors constraining its rating." In response to Fitchs assessment, the French Ministry of Finance stated that the government will continue to "fully mobilize" to control the deficit and public debt in a "responsible and balanced manner." This Fitch report is the first of a series of rating reviews set to take place in the coming weeks, coinciding with the 2027 budget debates. Reflecting on last year's fiscal stalemate, a government in France collapsed within 24 hours of its appointment, and both S&P Global Ratings and DBRS Morningstar subsequently downgraded France's rating.