France has already seen the prime minister voted by lawmakers, successors established, and nationwide protests this week. Investor attention changes to closely watched gauges of the country’s economic situation. A series of credit rating updates assess the risks associated with investing in a country’s debt. The downgrade could have a series knock-on effect on French borrowing costs, as measured by government bond yields, economists warn. Of the Big Three-rated agencies, Fitch will be updated on Friday, followed by Moody’s on October 24th, followed by Standard and Poor’s (S&P) on November 28th. These already have a solid focus on French debt loads. Last summer’s parliamentary elections collapsed as two governments competed for next year’s budget as they failed to reach one party or the bloc. France’s public deficit reached 5.8% of gross domestic product in 2024, reaching its highest level in the eurozone. Key questions remain as to how new Prime Minister Sebastian Lecorne will proceed, and whether he will stick to his predecessor François Bailloux’s 44 billion euros ($51.5 billion) proposal for spending cuts and tax cuts. Meanwhile, agents are weighing whether to raise, retain or lower their ratings from spring. Several people have given the country a negative outlook, but maintain its “double A” status, exhibiting low credit risk and maintaining it within the boundaries of the investment gradient. “If France loses its coveted Double A rating, it will have a serious impact on institutional (bond) holders,” Jeffries’ chief European financial economist Mohit Kumar told CNBC’s “Europe Early Edition.” “French debt is in great demand, especially from institutional holders from Asia, but they have a very strict standard of holding twice the debt,” he continued. A scenario in which political turmoil continues for more than three to six months and rating agencies downgrade the country will be “the worst scenario for French debt,” Kumar said. Selling in the bond market will bring about the amount paid to investors – a higher yield. “Closed Call” France’s borrowing costs movement remains relatively restrained this week, with many of the latest political developments widely anticipated in the market. Despite the uncertain outlook, bond yields for two, ten and 30 years have fallen below both recent and historic highs. In a memo at Deutsche Bank, an economist at Deutsche Bank said in a memo on Tuesday that the sub-risk of some sovereign ratings has already been priced in the bond market, adding that updating the rating would be a “close call.” “If this change was applied by only one of the rating agencies, the move to Single A would be unlikely to trigger a sale in itself,” they said. However, they continued that the background was “adverse”, given the overshoot of the French deficit, political uncertainty, the need for fiscal consolidation, and despite the potential ripple benefits for next year. In the short term, Deutsche Bank said the latest disruptions can slow individuals and businesses down on spending and investment, putting more pressure on the economy. Belenberg’s chief economist Holger Schmeading said on Tuesday that downgrading the rating was “possible” but “no major surprise.” “A true financial crisis with a fate loop of self-reinforcement (higher yields = greater deficits = even higher yields) remains absolutely unlikely for the time being. “Of course, we cannot completely rule it out,” he added. The best-risk situation for bonds occurs when there is a snap of a far-right national assembly or a parliamentary election in which French socialists gain power, Schmeeding said. “If extremists then try to implement an unissued agenda, bond investors may ultimately refuse to fund France,” he said. Some degree of protection is provided by the European Central Bank from crisis scenarios that could cause transmission between the wider euro area, according to George Lagarias, chief economist at Forvis Mazars. “The ECB, led by a former French finance minister, was not overly concerned about a catastrophic market event as it was delayed and stepped up to improve demand, which was late and soaring borrowing rates,” he told CNBC in an email. “But the ECB alone cannot correct the French economy. At some point in the near future, the government will be forced to impose unpopular austerity measures and address the pension system’s deficit.
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The French economy faces important risks beyond political turmoil
