Credit rating agency Moody’s has downgraded France’s seven largest banks this week – just days after lowering the country’s own sovereign credit rating. The move signals rising borrowing costs for France, adding to a €3.2 trillion debt burden and deepening the pressure on an already fragile government.
Former prime minister Michel Barnier, ousted earlier this month, warned of the growing fiscal strain in a last-ditch effort to push through a stringent budget plan. He said France’s interest payments alone were “mounting up to a staggering €60 billion” – exceeding the national defence or education budgets.
Moody’s cited “political fragmentation” as a key reason for its decision to downgrade France’s creditworthiness, further complicating efforts to stabilise the economy.
The downgrade will make borrowing more expensive for France.
"It is a huge warning about debt burdens and fiscal deficits," said Burhan Khadbai, of the Sovereign Debt Institute, a part of the Official Monetary and Financial Institutions Forum (OMFIF) think tank.
Last month, French government bonds traded above Greece’s for the first time, reflecting investor concerns.
“France is now seen as one of the riskiest economies in the eurozone,” Khadbai added.
Credit agency Fitch said in October that France's debt would reach 118.5 percent of GDP by 2028. The budget deficit is expected to exceed 6 percent, double the European Union limit.
France trades and behaves like a trible-B sovereign, like Greece and Spain.
REMARK Burhan Khadbai
The debt burden is also affecting French regions, including Paris and Île-de-France, as well as agencies like CADES, tasked with managing and repaying France’s social security debt.
Khabai called France’s downgrade “a warning for all countries”, drawing comparisons to the UK’s “mini-budget chaos” under Liz Truss two years ago.
“The UK is still recovering its reputation with investors,” he told RFI.
France braces for economic judgment amid political turmoil and record debt
PM’s daunting task
New Prime Minister François Bayrou now faces the challenge of forming a government that will face the same problem as all its predecessors, while navigating a divided parliament.
France’s political deadlock risks vetoing any fiscal reforms, while protests could erupt over unpopular measures.
But bringing down the debt "has to be a priority", said Khabai. He urged Paris to develop a sustainable fiscal policy, although political fragmentation makes consensus difficult.
Potential solutions range from tax increases to cutting social programmes or scaling back large infrastructure projects. Implementing viable reforms could improve France’s credit rating and ease borrowing costs in the future.
