S&P cut France's rating one notch, citing concerns that recent political turmoil jeopardizes the government's ability to fix the country's finances.
The downgrade followed a tumultuous week where Prime Minister Sebastien Lecornu barely survived two no-confidence votes in parliament. To gain enough support to stay in power, his new government had to sacrifice President Emmanuel Macron's deeply unpopular 2023 pension reform—a major policy concession.
S&P anticipates that this policy uncertainty will negatively affect the French economy by dampening both business investment and consumer spending, which will consequently slow economic growth.
Finance Minister Roland Lescure responded by emphasizing the urgent, shared responsibility of the government and parliament to pass the 2026 budget before the end of the year. This action is crucial to demonstrate how France plans to manage its rising debt, which S&P projects will climb from an estimated 112% of GDP at the end of 2024 to 121% of GDP by 2028. Passing the budget is seen as a necessary step to reassure markets about France's path toward the EU's 3% of GDP deficit ceiling by 2029.
S&P revised France's outlook from 'negative' to 'stable', noting that the downgrade balances the risk of increasing government debt and the lack of a strong political agreement on budget cuts against France's underlying economic strengths. However, the agency still sees a high level of uncertainty regarding public finances leading up to the 2027 presidential elections.
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The S&P downgrade of France, the Eurozone's second-largest economy, puts downward pressure on the euro primarily by shaking investor confidence in the bloc's overall political and fiscal cohesion.
While the immediate market reaction might be contained (as the downgrade was somewhat anticipated), the move highlights the country's rising debt-to-GDP ratio and the political gridlock that complicates efforts to rein in the deficit. This risk premium—the higher borrowing cost investors demand from a politically unstable country like France—can cause the spread between French and "safe-haven" German bond yields to widen, which historically has been interpreted as a negative signal for the euro.
Ultimately, prolonged political instability and failure to manage debt in a core Eurozone member weakens the economic and governing credibility of the entire monetary union, making the euro less attractive relative to other major currencies like the US dollar.
