Rating action

Scope Ratings GmbH (Scope) has today downgraded France’s local and foreign currency long-term issuer and senior unsecured debt ratings to AA-, from AA, and revised the Outlooks to Stable, from Negative. The short-term issuer ratings have been affirmed at S-1+ in local and foreign currency with Stable Outlooks.

The downgrade of France’s long-term ratings is driven by:

1. The sustained deterioration of public finances characterised by higher-than-expected fiscal deficits and a steady rise in general government debt. Scope now expects a more gradual reduction of the budget deficit, which is set to still exceed 3% of GDP by 2029. While the government has introduced an ambitious EUR 60bn (around 2% of GDP) fiscal consolidation plan, the moderate growth outlook and uncertainties regarding timely implementation, given the challenging political outlook, pose significant risks. General government debt is projected to rise to 119% of GDP by 2029, from 97.4% in 2019. This trajectory represents a key credit challenge limiting the government’s capacity to absorb future shocks.
    
2. The challenging political outlook following the 2024 early legislative elections, which have reduced the level of political alignment between the presidency, government and parliament, while further increasing parliamentary fragmentation. This raises uncertainty on the implementation of the multi-year budget and reform agenda. Stronger opposition in parliament is likely to curb the government’s ability to reduce public spending and raise potential GDP growth, especially as the 2027 presidential election approaches. This increases the risk that medium-term credit challenges remain unaddressed, underpinning Scope’s decision to downgrade France’s credit ratings to AA-.

The Stable Outlooks reflect Scope’s view that France’s AA- credit rating is well supported and resilient to fiscal slippage and political uncertainty until the next presidential election in 2027. This reflects the country’s leading role in Europe’s economic, financial and security architecture, its economic resilience, favourable debt profile, excellent market access, and robust banking sector.

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Key rating drivers

Budgetary slippage, high fiscal deficits, and a very gradual fiscal consolidation path drive a steady rise in general government debt-to-GDP. The budget deficit reached 5.5% of GDP in 2023, significantly above the government’s target of 4.9%¹, due to tax revenue shortfalls amid a moderate real GDP growth rate of 1.1% and despite a gradual phasing out of energy subsidies. For 2024, the budget deficit is expected to widen to 6.1% of GDP, well above the government’s previous target of 5.1%². The widening deficit is driven by higher state and local government spending, despite the previous government’s plan to save EUR 16.5bn, and lower-than-anticipated revenue, especially VAT.

For 2025, Scope expects the deficit to narrow to 5.2% of GDP, compared to a previous projection of 4.6%, and the government’s revised target of 5.0%, and an estimated 7.0% of GDP in a no policy change scenario³. The 2025 draft budget and social security bill submitted to the parliament are structured around a saving plan of EUR 60.6bn (about 2% of GDP), comprising EUR 41.3bn of spending cuts and EUR 19.3bn of additional revenue, of which EUR 13.6bn are on corporates and EUR 5.7bn on individual taxpayers. Proposed discretionary measures include a reduction of tax relief for corporates (EUR 4.7bn), a 6-month postponement in the inflation indexation of pensions (EUR 3.6bn), an increase in energy excise duties for households (EUR 3.0bn), and a rise in the pension contribution rate for local and hospital public servants (EUR 2.3bn). While Scope expects the government to pass the 2025 budget, the highly fragmented parliament is likely to amend some of the measures, reducing the immediate impact of the savings plan, which drives Scope’s expectation of a slightly higher deficit than the government’s target for 2025.

Over the medium-term, France’s persistent fiscal deficits and regular revisions of fiscal targets undermine confidence in the multi-year budget plan to comply with the European economic governance framework. The government has postponed by 2-years the reduction of the deficit to below 3% of GDP, from 2.9% in 2027 to 2.8% of GDP in 2029, assuming a fiscal adjustment of 0.8 point of GDP per year on average. Conversely, Scope expects a less ambitious consolidation effort, with the deficit declining by 0.5 point of GDP per year on average, resulting in a deficit of 3.8% of GDP by 2029. This trajectory accounts for the uncertainty surrounding the execution of the government’s fiscal strategy over the 2026-29 period as well as the moderate growth and inflation outlook.

In addition, the planned spending-based consolidation is expected to be challenged by increasing pressures on military expenditure, ageing costs and energy investments, alongside rising net interest payments, which are set to rise from less than 2% of GDP in 2023 to more than 3% by 2029. The prospects for revenue-based consolidation are constrained by an already high tax burden and a moderate, albeit resilient economic activity. Real GDP growth is projected at 1.1% in 2024 and 2025, and at 1.2% on average between 2026 and 2029, in line with the government’s revised estimate of potential GDP growth. Lower inflation and interest rates are expected to support private demand, although a more restrictive fiscal stance and heightened geopolitical tensions could weigh on growth prospects.

The recent budgetary slippage coupled with moderate economic growth is driving a sharp increase in general government debt. Scope now projects general government debt-to-GDP to rise from an elevated 109.9% in 2023 to 114.8% in 2025 and 119.0% in 2029, against a previous projection of 113.0%. General government debt, which stood at 60% of GDP in 2001, is set to increase by around 20 points between 2019 and 2029, among the highest relative to euro area and credit rating peers. This revision reflects Scope’s expectation that fiscal buffers used during the Covid pandemic and the cost-of-living crisis will not be restored, increasing the risk that potential external shocks could further exacerbate the upward pressure on general government debt over the medium term.


The challenging political outlook raises uncertainty on the implementation of the multi-year budget plan and reform agenda. The 2024 early legislative elections have weakened the political alignment between the presidency, government and parliament, and further increased parliamentary fragmentation. Opposition parties to the government’s policy agenda have gained further control of the National Assembly, amplifying the trend that emerged during the 2022 elections when the presidential party lost its absolute majority. High parliamentary fragmentation and a stronger opposition means that the current government requires the tacit approval of the far-right party to pass reforms through the National Assembly, curbing the prospects for unpopular policy trade-offs, for instance, on social spending, tax revenues and/or employment policy, especially as the 2027 presidential election approaches.

Although not Scope’s baseline, a stronger parliamentary opposition could also attempt to unwind previous reforms, for example, on pensions. In addition, the current political environment raises the risk of political paralysis and/or instability as opposition parties in the National Assembly are more likely to successfully introduce a no confidence vote against the government. Such a scenario would derail the implementation of the government’s budget plan and policy reform agenda ahead of the next legislative elections, which could be called in July 2025 at the earliest, and ahead of the municipal elections in 2026. Finally, the next presidential election, scheduled for 2027, further raises uncertainty on the execution of the government’s budget plan to reduce the budget deficit below 3% of GDP by 2029.

Credit rating strengths: leading role in Europe, economic resilience, favourable debt profile, excellent market access, and robust banking sector. France’s AA- credit ratings are supported by its euro area membership as a EU founding member, leading guarantor of the European institutional framework and driver of European integration. Its international role, military capacity and large nuclear industry further bolster its creditworthiness in the current geopolitical environment.

The AA- rating is further supported by France’s economic resilience underpinned by its large economy, high GDP per capita and diversified economic structure driven by high value-added activities. Moreover, the credit ratings are supported by France’s favourable debt profile, with a long and rising average maturity, excellent market access and strong debt management, with a well-diversified investor base. Finally, France’s credit ratings are supported by its robust banking sector with strong capitalisation and favourable liquidity metrics.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the coming 12 to 18 months.

Upside scenarios for the ratings and Outlooks are (individually or collectively):

1. Stronger fiscal outlook, with general government debt-to-GDP on a firmly declining trajectory;
    
2. Stronger economic growth outlook and potential driven by reform implementation.

Downside scenarios for the ratings and Outlooks are (individually or collectively):

1. Significantly weaker governance outlook and major policy shifts challenging France’s leading role in Europe;
    
2. Significantly weaker fiscal outlook, leading to a more pronounced rise in government debt-to-GDP.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘a’ for France. Under Scope’s methodology, the indicative rating receives 1) a one-notch positive adjustment from the methodological reserve-currency adjustment; and 2) no adjustment from the methodological political-risk quantitative adjustment. On this basis, a final SQM quantitative rating of ‘a+’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on France’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states.

For France, the QS signals relative credit strengths against indicative sovereign peers for the following qualitative analytical category: i) macro-economic stability and sustainability; ii) debt profile and market access; iii) resilience to short-term external shocks; iv) banking sector performance; and v) environmental factors. Conversely, the relative QS credit weakness is signalled for: i) fiscal policy framework.

Combined relative credit strengths and weaknesses generate a one-notch positive adjustment via the QS and signals AA- credit ratings for France.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

With respect to environmental factors, France performs strongly on carbon emissions per unit of GDP and natural disaster vulnerability relative to its credit rating peers. Nuclear energy is expected to remain a key driver of the country’s climate transition strategy, as reflected in the full nationalisation of the national utility provider and the planned investment into new reactors. Even though reaching targets set in the Paris Agreement is more uncertain due to budgetary trade-offs, renewable energy is expected to anchor the upcoming revision of the national low-carbon strategy. France has embedded climate transition into its funding strategy, with a record of green bond issuances, and its state budget, by listing expenditure having a favourable impact on the environment. This drives a ‘strong’ qualitative assessment relative to peers.

In terms of social factors, France displays demographic trends that compare favourably with those of most European peers, although the steady increase of the old-age-dependency ratio remains a challenge. While the implementation of the 2023 pension reform should mitigate the associated pressures on social spending, population ageing remains a constraint on long-term growth and fiscal outlooks. Labour market reforms have driven a significant reduction in unemployment, even though a lower labour force participation rate relative to most of the credit rating peers reflects ongoing bottlenecks. This drives a ‘neutral’ qualitative assessment relative to peers.

For governance-related factors, France’s scores are in line with rating peers, as assessed by the World Bank’s Worldwide Governance Indicators. France has strong and effective institutions, but a longstanding trend of political fragmentation and polarisation, as reflected in the outcome of the 2024 early legislative elections, complicates policymaking and increases the risk of political instability. This drives a ‘neutral’ qualitative assessment relative to peers.

Rating committee
The main points discussed by the rating committee were: i) domestic economic risk; ii) public finance risk; iii) external economic risk; iv) financial stability risk; v) ESG-related risk; and vi) rating peers.

Rating driver references
1. Gouvernement, Loi de programmation des finances publiques, Décembre 2023
2. Gouvernement, Programme de stabilité, Avril 2024
3. Gouvernement, Projet de loi de finances 2025, Octobre 2024

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 4.0), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation   YES
With access to internal documents                                YES
With access to management                                          YES
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Thomas Gillet, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 26 May 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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