France's credit outlook splits rating agencies: Fitch turns negative, Moody’s stays stable, bond risk sees biggest drop

Fitch warned that France’s debt outlook is worsening, projecting debt to reach 124% of GDP by 2028 amid weak growth. Moody’s kept its Aa3 rating unchanged. Despite a recent rally that narrowed the French-German bond spread, fiscal concerns and budget challenges persist.

Credit ratings agency Fitch on ‌Friday revised France's outlook to "negative" from "stable", warning that deteriorating fiscal conditions and political fragmentation are undermining debt stabilization prospects.

The agency pointed to weaker growth, higher borrowing costs and a wider deficit ​since its August review, compounded by a fractured political landscape that is ​making sustained fiscal consolidation harder to deliver.

Why Fitch downgraded France's outlook

Fitch predicted that the debt level for the European Union's second biggest economy would rise from nearly 115.7 percent of GDP in 2025 to 124 percent in 2028. In its last review in August, Fitch had forecast that France's debt would reach 122.7 percent of GDP in 2028.

"Weaker growth, renewed fiscal deterioration and higher yields have increased the challenge of delivering the necessary sustained fiscal consolidation to arrest France's worsening debt trajectory," Fitch said.

According to Fitch’s outlook, the prospects for debt reduction after the presidential election in April-May next year were "uncertain".

It said the political divisions, with far-right and far-left candidates leading opinion poll surveys, would make it difficult to agree "a credible fiscal strategy".

"The emerging policy debate ahead of the presidential election has not materially strengthened Fitch's confidence in the prospects for durable deficit reduction that could lead to debt stabilization. Large protests over public services and living costs further complicate the social context for fiscal consolidation," it said.

International investors have expressed widespread concern over France's debt level and this has pushed up the interest yields it pays to service debt, which is one of the highest in Europe.

The outlook revision adds to pressure on the government ahead of more planned protests this weekend, underscoring the political challenges of implementing spending cuts and deficit-reduction measures.

French bond risk falls

French 10-year yields hit ​their highest since 2002 last week at more than 5.14%, rising more sharply than ​those of most peers, reflecting greater sensitivity to shifts in market confidence amid concerns over France's ‌fiscal trajectory, struggle to pass a budget and social unrest.

Earlier, the INSEE national statistics agency reported Friday that the economy has not grown so far this year and contracted in the period from July to September.

Meanwhile, France on Friday managed to avoid another rating downgrade, this time by Moody’s. Moody’s kept France’s rating steady at Aa3 with a negative outlook. The following markets rally has led to French bond risk being poised for its biggest drop since the 2020 pandemic. According to Bloomberg, the extra yield investors demand to hold 10-year French bonds, known as OATs, over safer German debt fell 13 basis points to 154 basis points on Monday, the largest drop in six years on a closing basis.