France hit by surprise credit downgrade, bonds under pressure

Rating cut by S&P raises concerns over budget plans and political gridlock

France’s government bonds fell after S&P Global Ratings unexpectedly downgraded the country’s credit rating from AA-to A+, citing growing budget concerns and political uncertainty. The move has raised borrowing costs and triggered fears that some institutional investors may be forced to sell French debt due to strict investment rules.

The downgrade — France’s second in just over a month after a similar move by Fitch — comes as Prime Minister Sébastien Lecornu struggles to pass a budget through a deeply divided parliament. His recent survival of no-confidence votes came at the cost of suspending President Emmanuel Macron’s controversial pension reform, which was meant to help stabilize public finances.

French 10-year bond yields rose to 3.39%, widening the spread with German bonds, a key indicator of market risk. That spread had already surged after Macron’s snap elections last year left the country with a hung parliament — the most severe political deadlock since the Fifth Republic was founded in 1958, according to S&P.

The downgrade could make French bonds less attractive to conservative investors such as central banks and pension funds, many of whom require holdings with high credit ratings. However, France still retains an investment-grade rating and remains a core member of the eurozone economy.

Economist Mohamed El-Erian warned the move could hurt France’s credibility and underscores the need for broader reforms across Europe. “It raises borrowing costs and shakes confidence in a region already in need of structural change,” he said.

As attention turns to Moody’s, set to publish its rating soon, France’s ability to regain control over its finances remains under the spotlight.