Fitch downgrades France's rating outlook to 'negative' amid economic stagnation

Negative outlook despite maintained rating

On October 30, rating agency Fitch confirmed France's sovereign rating at A+ but downgraded the outlook from 'stable' to 'negative'. The agency cited slower growth, higher borrowing costs, and a larger deficit compared to its previous assessment in August. Meanwhile, the rating continues to be supported by 'the size, wealth, and diversification of the economy, institutional resilience, eurozone membership, and the stability of the banking sector', as reported by Euronews citing the agency's decision.

The economy has 'stalled'

Fitch's verdict followed the release of data by the statistical institute Insee: France's gross domestic product contracted by 0.1% in the third quarter after stagnation in the second quarter and a 0.2% decline in the first. Roland Lescure, Minister of Economy and Finance, described the economy as 'stalled' during an interview on Franceinfo, warning that the country would 'hit a wall' if the budget is not adopted. Fitch also emphasized that 'ongoing political fragmentation' and a 'complex social environment' marked by mass protests 'further complicate the implementation of sustainable fiscal consolidation'.

The 2027 budget and the parliamentary majority challenge

In a statement to the media, Lescure said he 'takes note' of the agency's decision and called it confirmation of the 'absolute necessity to adopt a responsible budget by the end of the year' that reduces the deficit to 5%. However, the chances of passing the document through a parliamentary vote appear uncertain due to the lack of a majority in the National Assembly and the approaching presidential elections. Fitch noted that political debates in the six months leading up to the vote 'have not significantly strengthened the agency's confidence' in the possibility of sustainable deficit reduction and expects the budget to be adopted 'through constitutional mechanismsof the government'.

Article 49.3 or ordinances

In case of a parliamentary blockade, Lescure stated that the government does not rule out invoking Article 49.3 of the Constitution, which allows a bill to be adopted without a vote unless a vote of no confidence is approved. Another option is ordinances, a procedure that has never been used to adopt a budget since the establishment of the Fifth Republic in 1958. Jérôme Matis, an economics professor at Paris Dauphine University, told Euronews that a budget adopted via ordinances could reduce uncertainty in the short term but would not restore long-term confidence in fiscal policy: 'Markets usually prefer a contested solution over a prolonged absence of a decision', yet if such a budget is perceived as weak or subject to revision after the presidential elections, the positive impact on investor confidence may remain limited.