France’s credit rating has been downgraded from AA- to A+, the country’s lowest on record, by Fitch Ratings, citing political instability and uncertainty over the government’s ability to rein in mounting debt and budget deficit. The country’s debt level, at approximately 113% of GDP, is one of the highest in the European Union, after Greece and Italy. Additionally, its deficit is projected to be between 5.4-5.8% this year, exceeding the EU’s 3% limit.

The downgrade comes after the ouster of Prime Minister Francois Bayrou, who lost a confidence vote on his €44 billion austerity plan. The plan aimed to reduce the deficit and debt by cutting public-sector jobs, curbing welfare, and scrapping two public holidays. Fitch stated that the government’s defeat in the confidence vote “illustrates the increased fragmentation and polarization of domestic politics,” weakening the political system’s capacity to deliver substantial fiscal consolidation.

Fitch warned that France’s deficit is unlikely to decrease in the next several years and predicted that debt will rise further to 121% in 2027, citing a lack of “a clear horizon for debt stabilization” due to political instability. The agency also noted that high taxes and large social spending leave little room to stabilize finances, and cautioned that the 2027 presidential race will likely limit the potential for fiscal reforms.

Outgoing Finance Minister Eric Lombard acknowledged the downgrade but emphasized that the economy is strong. He attributed fiscal strains to interest rates that are “too high” and noted that new Prime Minister Sebastien Lecornu is consulting parliament on a budget to restore public finances. The downgrade is expected to increase borrowing costs, with France’s ten-year yield climbing to 3.5% on Friday, near Italy’s level, one of the weakest performers in the bloc.

The increased borrowing costs could lead to higher debt-servicing costs, which experts warn could have significant implications. Some experts also caution that the downgrade could prompt similar cuts by other agencies, triggering forced selling by institutional investors barred from holding debt below AA. The development has sparked concerns about the potential impact on the Eurozone, with some experts warning that French debt poses a danger to the region’s economic stability.