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Market Shock After Fitch’s Downgrade

France’s borrowing costs ticked higher this week after Fitch Ratings downgraded the country’s sovereign credit rating from ‘AA-’ to ‘A+’ with a stable outlook. The downgrade, announced late Friday, has intensified concerns among investors about the country’s fiscal trajectory and deepening political instability.

On Monday morning, yields on France’s benchmark 10-year government bonds initially jumped by 7 basis points to 3.513%, while 30-year bonds (known as OATs) rose 8 basis points to 4.335%. Though yields later eased back, the move reflected growing caution among traders who are increasingly pricing in the risk of further credit rating cuts by other major agencies.

Political Instability Fuels Market Anxiety

This ratings blow comes amid more than a year of political turbulence in France. The collapse of former Prime Minister François Bayrou’s government last week after a failed confidence vote has only heightened investor fears. In response, President Emmanuel Macron swiftly appointed Sébastien Lecornu as the new Prime Minister—France’s fifth PM in under two years.

Lecornu inherits a fractured National Assembly and a contentious battle over the 2026 budget. Bayrou’s government had proposed €44 billion ($51.5 billion) in spending cuts to rein in France’s mounting deficit, but the plan sparked mass protests and fierce resistance from unions and opposition parties. Lecornu has already faced demonstrations on his first day in office, with nationwide strikes and union-backed protests planned for Thursday, threatening to paralyze transportation and public services.

France’s Debt Outlook Worsens

Fitch cited France’s “high and rising debt ratio” and warned that “political fragmentation” is obstructing much-needed fiscal reforms. The agency forecasts that France’s budget deficit will shrink only slightly from 5.8% of GDP in 2024 to 5.5% in 2025, still far above the eurozone median of 2.7%.

Even more troubling, Fitch projects France’s public debt will climb to 121% of GDP by 2027, up from 113.2% in 2024, with “no clear horizon for debt stabilization.” This trajectory places France among the most indebted economies in the eurozone, second only to Greece and Italy, and raises the stakes for any further loss of investor confidence.

More Credit Downgrades Could Follow

Fitch’s downgrade may be only the beginning. Moody’s is scheduled to review France’s credit rating on October 24, followed by Standard & Poor’s on November 28. Analysts warn that if these agencies echo Fitch’s concerns, France could face steeper borrowing costs and a sharper sell-off in its bond markets.

“French sovereign bonds have already been trading at spreads that suggest markets are bracing for multiple downgrades,” analysts at ING noted on Monday. They added that the muted initial reaction from bond markets and the euro reflects the fact that Fitch’s downgrade was largely expected, but warned that sentiment could quickly shift if Lecornu struggles to pass budget reforms.

Lecornu’s Early Moves and Investor Sentiment

Attempting to soften public anger, Lecornu has already scrapped one of Bayrou’s most unpopular austerity measures: a proposal to eliminate two public holidays as a cost-saving measure. However, markets remain skeptical that he can unify France’s deeply divided parliament around painful fiscal consolidation measures like spending cuts and tax hikes.

Despite the political headwinds, ING said it does not expect the situation to trigger a broader eurozone crisis, but cautioned that currency traders will be watching France’s debt markets closely in the weeks ahead.