Reference News Network September 14 report - According to AFP on September 12, the international rating agency Fitch downgraded France's sovereign credit rating to A+ late Friday, citing the country's ongoing political turmoil and uncertain fiscal outlook, which have hindered the recovery of its severely deteriorating public finances. Following the fall of the Barnier government and the appointment of a new prime minister four days earlier, Fitch, as the first institution this autumn to initiate a rating review for France, made a severe assessment of the public finances of the second-largest economy in the eurozone.

Fitch stated in a statement that "political fragmentation and polarization are increasingly intensifying," and that "this unstable situation undermines the political system's ability to implement large-scale fiscal consolidation." The agency determined that France is unable to achieve the target set by the previous government of keeping the budget deficit below 3% of GDP by 2029 (a goal aimed at making France compliant with EU fiscal requirements).

Former Minister of Economy Eric Lombard said he was "aware" of the rating decision. Francois Baroin, who has repeatedly criticized France's massive debt, said: "When the 'elite' of a country refuses to face reality, the country is destined to pay the price." In contrast, Eric Coquerel, chairman of the French National Assembly's finance committee and a member of the left-wing party "France Insoumise," considered this downgrade to be "a doomsday prediction about the country's financial situation over the past two months."

Sebastien Lecornu, who took office as prime minister on Tuesday, is racing to draft the 2026 budget bill in an effort to avoid rejection by the opposition.

Under social tensions, he has already begun consultations with social partners. However, Fitch believes that the discussion on the 2026 budget may reduce the 44 billion euro fiscal austerity measures advocated by Francois Baroin, which would threaten the target of keeping the deficit rate at 4.6% next year - Fitch predicts that this figure will remain above 5% in 2026 and 2027.

France previously had an AA- rating (negative outlook indicating possible downgrade), and the new rating confirms a stable outlook. France's public finances are among the worst in the eurozone: debt reached 113.9% of GDP by the end of March, and the Barnier government expects a deficit of 5.4% in 2025. Although economic growth could reach 0.8%, the National Institute of Statistics and Economic Studies pointed out that the economy is suffering from a general lack of confidence.

Fitch noted that France's debt will continue to grow, reaching 121% of GDP by 2027, and that there is "a lack of clear stability prospects" after the election, with the risk of political gridlock always present. In contrast, Fitch praised Portugal's deleveraging, while S&P Global affirmed Spain's economic vitality. These two countries, once the "underachievers" of Europe, now have their credit ratings upgraded.

This rating downgrade reflects an assessment of France's debt repayment capacity, marking a turning point for the country. Despite this, the short-term impact for Paris may be limited.

Fitch downgraded France's rating from the original "high grade" to "upper middle grade," equivalent to 16 points on a 20-point scale, which could lead investors to sell French bonds and shift to lower-risk assets, thereby increasing interest rates.

This will cause France to pay even more in interest on its debt, expected to be around 55 billion euros in 2025. Since the dissolution of parliament in June 2024, the cost of French debt has been far higher than Germany's, and even exceeded Italy's this Tuesday.

However, economist Lucille Bombardier from Astier Consulting emphasized: "What really matters is the trajectory of public finances and the government's ability to fulfill its commitments. The market has already drawn conclusions, and rating agencies seem to always be half a step behind."

This is the second time Fitch has downgraded France's rating since April 2023, which may signal that the other two major international rating agencies will also take similar actions: Moody's will announce its rating on October 24, and S&P will announce its rating on November 28. (Translated by Pan Geping)

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