Fitch downgrades France's credit rating to lowest in history, Macron calls for urgent government formation

(Patria) - Credit rating agency Fitch downgraded France's sovereign credit rating on Friday to the lowest level in the country's history, stripping the eurozone's second-largest economy of its AA- status as it faces a political crisis and rising debt, Reuters reported.

This move, by which Fitch lowered the rating to A+, puts pressure on Prime Minister Sebastien Lecornu just days after taking office, as he struggles to form a cabinet and draft a 2026 budget that can pass a deeply divided parliament.

Fitch said the rating, the lowest ever recorded by a major credit rating agency, has a stable outlook for future moves, attributing the downgrade to a lack of "a clear horizon for debt stabilization in the coming years."

Analysts said the downgrade was already priced into the market. However, the timing of the move is awkward for France and underscores growing investor concern about its ability to curb its budget deficit - now the largest in the eurozone.

President Emmanuel Macron this week called on Lecornu, a conservative loyalist, to form a government after lawmakers ousted veteran centrist Francois Bayrou in a confidence vote over his plans for a 44 billion euro budget cut.

Lecornu became Macron's fifth prime minister in less than two years and faces the nearly impossible task of passing a reduced budget through parliament - trials that led to the defenestration of the last two French prime ministers.

"This instability weakens the political system's ability to achieve significant fiscal consolidation," Fitch said.

Finance Minister Eric Lombard said he had taken note of Fitch's move and that Lecornu continues consultations with lawmakers to adopt the budget and restore public finances.

The downgrade by Fitch to A+ has greater consequences than recent downgrades because it could signal that other countries will follow suit, potentially leading to forced selling of French bonds by investors constrained by rating thresholds.

French debt has been under pressure since Bayrou faced a confidence vote last month, bringing borrowing costs closer to those of Italy, which carries the second-largest debt burden in the eurozone and a much lower credit rating.

While bond markets are closely watching the situation, Lecornu must find ways to reduce the budget deficit next year from an estimated 5.4 percent of GDP, although his plan will likely be less ambitious than Bayrou's target of 4.6 percent. His draft budget needs to be submitted to parliament by October 7, although in extreme need he could postpone it until October 13.

To gain sufficient parliamentary support, Lecornu is expected to make concessions to socialists, including higher taxes for the wealthy and easing Macron's hard-fought 2023 pension reform. But he risks alienating lawmakers in Macron's own party and conservative Republicans if he goes too far.

The downgrade of France's rating to A+ is unlikely to pressure its major banks, given that BNP Paribas and Credit Agricole are already rated A+, and Societe Generale one notch lower by Fitch.