By Thomas Gillet and Brian Marly, Sovereign and Public Sector

Growing concerns about France’s fiscal and political outlooks have led to worse funding conditions for the government since President Emmanuel Macron called early legislative elections in June 2024. Yields on 10-year French bonds have moderately diverged from those issued by Germany (AAA/Stable) while converging towards those of lower-rated euro countries such as Spain (A/Stable) and Portugal (A-/Positive).

We downgraded France to AA- on 18 October because of the deteriorating fiscal outlook and fragmented political environment. Recurrent revisions of fiscal targets and recent budgetary slippage undermine confidence in the government’s ability to comply with new EU fiscal rules.

A challenging political outlook, with no coalition holding a majority in National Assembly, is likely to slow budgetary consolidation, hence our projection of steadily rising general government debt to 119% of GDP by 2029 from 97% in 2019. Large budget deficits and higher amortisation will ensure the amount issued in coming years exceeds the long-term average.

Investor demand immune from fiscal and political developments to date

Even so, the Stable Outlook reflects France’s many credit strengths, particularly strong investor demand for French government bonds supporting the market access that the French Treasury benefits from.

Since the snap elections in the summer, the bid-to-cover ratio on medium-to-long term government bond auctions has remained around 2.7 between June and September 2024, in line with its long-term average since the early 2000s.

Diversified investors, debt profile and safe-haven status drive high liquidity

This reflects a diversified and balanced investor base, with about 55% of debt held by non-residents, an average maturity on marketable debt exceeding eight years, and a debt stock fully denominated in euro.

Benchmark-sized issuance, diversified debt instruments across the yield curve including green and inflation-linked bonds, transparently managed and regular auctions, and an extensive network of primary dealers also support investor demand and high liquidity.

We expect France’s 2025 funding programme (slightly lower at EUR 307bn compared with EUR 319bn in 2024) to continue to meet strong investor demand.

This is also supported by the expected limited issuance volume from Germany (AAA/Stable), particularly after the collapse of the coalition government, with a snap election due in February.

Investor appetite for French debt may also benefit from the uncertain global geopolitical outlook, not least with Donald Trump returning to the US presidency, given France’s safe-haven status as a core euro area member state.

Finally, France’s market access is complemented by its large, diversified and wealthy economy, alongside a sound and mature financial system.

Funding conditions are likely to remain sensitive to near-term fiscal and political developments, but our baseline scenario is that France’s core credit strengths offset the challenging fiscal and political outlooks at the AA-/Stable level ahead of the next presidential election in 2027.

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