France’s Economic Strengths Balance Increasingly Challenging Fiscal, Political Outlooks

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 government bonds have diverged moderately from German bonds while converging with those of lower-rated euro-area sovereigns such as Spain and Portugal.

Scope Ratings (Scope) downgraded France to AA- from 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 the National Assembly, is likely to slow budgetary consolidation, hence Scope’s projection of steadily rising general government debt to 119% of GDP by 2029 from 97% in 2019. Large budget deficits and higher amortisations will ensure the amount issued in the coming years exceeds long-term averages (Figure 1).

Figure 1. Higher budget deficits, amortisations keep bond issuance near record highs

Total amount issued, estimates, % of GDP

Investor Demand Immune from Fiscal and Political Developments to Date

Even so, the Stable Outlook Scope assigned to the French sovereign following the downgrade reflects France’s many fiscal strengths, particularly strong investor demand for its government bonds. Since the snap elections in the summer, the bid-to-cover ratio at medium and long-term government bond auctions remained around 2.7 between June and September 2024, in line with its long-term average since the early 2000s (Figure 2).

Figure 2. Investor demand mitigates risks stemming from higher interest rates

Cover ratio (LHS), average rate (RHS)

Diversified Investors, Debt Profile and Safe-haven Status Drive High Liquidity

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

Scope Ratings expects France’s 2025 funding programme (estimated slightly lower at EUR 307bn compared with EUR 319bn in 2024) to continue to meet strong investor demand. This is also supported by limited issuance volume expected from Germany, particularly after the collapse of its coalition government, with snap elections 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 Scope’s baseline scenario is that France’s core economic strengths offset the challenging fiscal and political outlooks at the AA- sovereign-rating level ahead of the next presidential election in 2027.

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Thomas Gillet is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH, and primary analyst on France’s sovereign credit rating. Brian Marly, a senior analyst at Scope, contributed to drafting this comment.