Key Points

• Fitch downgrades France's credit outlook to negative, but maintains its A+ rating
• French public debt could rise to 124% of GDP by 2028
• Rising bond yields could push up government interest expenses.

After Fitch Ratings downgraded France's sovereign debt outlook from stable to negative on October 30, France's credit prospects further deteriorated. The agency warned that weak economic growth, rising borrowing costs, and persistent budget deficits are making it increasingly difficult for France to stabilize its finances.

Fitch maintains France's A+ credit rating unchanged, but the downgraded outlook implies there is still a possibility of further downgrade in the future. Reuters reports that Fitch now expects France's government debt to rise from 115.7% of GDP in 2025 to about 124% by 2028.

This decision comes at a time when France is facing the highest borrowing costs in over 20 years. The yield on French 10-year government bonds recently exceeded 5.14%, for the first time since 2002.

French debt may rise to 124% as interest costs increase

Fitch's revised forecast highlights an increasingly serious problem facing Europe's second-largest economy: government debt is expanding, and the cost of financing it is also rising.

The institution expects that interest expenses will rise from 2.5% of GDP in 2025 to 3.3% in 2028. At the same time, the budget deficit is expected to remain at around 5.5% of GDP in 2027, which is significantly higher than the EU's reference threshold of 3%.

Higher borrowing costs can create a difficult cycle. As existing bonds mature, France will have to refinance part of its debt at the market interest rates at that time, which could push up interest payments and reduce the funds available for public services and investment.

This pressure is also part of a broader global sell-off of bonds that has affected the United States, the United Kingdom, and other developed economies.

The bond market has already taken into account France's fiscal risks.

Financial markets have been sending signals of concern regarding France's fiscal situation for several weeks now.

On October 22, the yield on 10-year French government bonds rose to around 5.14%, and the borrowing cost gap between France and Germany widened to nearly 178 basis points, reaching the highest level since the eurozone debt crisis in 2011.

The importance of the widening interest rate spread lies in the fact that German government bonds are regarded as the benchmark for relatively low-risk borrowing in the eurozone. The higher yield in France indicates that investors are demanding more compensation to cover the uncertainties in its finances.

This turmoil has also affected the foreign exchange market, with the Swiss franc strengthening against the euro as investors seek safer assets.

European banks also face another potential consequence. Rising sovereign yields will push down the prices of existing bonds, putting pressure on the valuations of the asset portfolios held by financial institutions, a mechanism that was already evident during the sell-off of European bank stocks in October.

Fitch warns that greater pressure will be placed on France's 2027 budget

Against the backdrop of political disagreements and difficulties in gaining support for spending cuts and tax increases, France's fiscal challenges have further intensified.

The French economy contracted by 0.1% in the third quarter, while the government is attempting to negotiate a 2027 budget aimed at reducing the deficit. Economic Minister Roland Lescouret ( Roland Lescure ) reiterated that the government is committed to bringing the deficit down to 5%.

Fitch's decision comes shortly after Moody's, which maintained France's Aa3 rating unchanged but with a negative outlook, indicating that concerns about debt sustainability do not come from just one rating agency.

This situation also poses challenges for the European Central Bank, as persistent inflation and higher sovereign borrowing costs make interest rate policies in developed markets more complex.