France is locking in a 4.8% deficit ceiling for 2026, as the government scrambles to hold its fiscal credibility together and avoid choking under its own debt.
Francois Villeroy de Galhau, Governor of the Bank of France, told lawmakers that capping the budget shortfall at that level is the only way to stay on track toward a 3% deficit target by 2029.
“It is absolutely necessary to get within 3% between now and 2029 and this means a maximum deficit of 4.8% next year to cover a quarter of the path,” Villeroy said in an interview with La Croix, warning that anything more risks pushing France into “gradual suffocation.”
The National Assembly is still grinding through the 2026 draft budget. It currently sets a deficit of 4.7%. But Prime Minister Sebastien Lecornu, whose survival depends on opposition support, has publicly floated flexibility.
He says the real aim is to stay “within 5%,” if that’s what it takes to avoid another political bloodbath. “It is no longer possible to govern by the discipline of one camp alone,” Lecornu told lawmakers, “but by the cultivation of a rigorous debate between lawmakers who start with different beliefs.”
Credit outlook slashed as Macron’s pension freeze fuels backlash
Moody’s Ratings didn’t waste time reacting. The agency slashed France’s credit outlook from stable to negative, citing political gridlock and legislative chaos.
“The decision to change the outlook to negative reflects the increased risk that the fragmentation of the country’s political landscape will continue to impair the functioning of France’s legislative institutions,” it said Friday.
France still holds a Aa3 rating, seven levels above junk, on par with the UK and Czech Republic. But that gap is shrinking fast.
This downgrade followed earlier hits from S&P, Fitch, and DBRS, as investors began questioning how long France could delay difficult decisions. One of those delays?President Emmanuel Macron’s pension reform, which would have raised the retirement age from 62 to 64.
Lecornu suspended it under pressure from left-leaning opposition lawmakers. But Moody’s warned that leaving the reform on ice for too long would damage growth and worsen long-term budget risks.
Even that hasn’t calmed tensions. The Socialists, who Lecornu needs to keep his job, are threatening no-confidence votes unless the budget includes fewer cuts and new taxes on rich households and big corporations. Lecornu is trying to keep them at bay without triggering another collapse. He also backed off using Article 49.3, a constitutional tool that allows governments to bypass votes, saying this battle would have to be fought “the hard way,” through direct negotiation.
Market pressure builds as spread with Germany widens
The government’s proposed draft trims the deficit from 5.4% in 2025 to 4.7% in 2026, but there’s no guarantee it survives the Assembly floor intact.
Lecornu has said lawmakers are free to adjust it, so long as the number stays below 5% and doesn’t derail the longer-term 3% goal. Finance Minister Roland Lescure responded to Moody’s cut by insisting France remains committed to a “ambitious” deficit reduction.
But he admitted the outlook downgrade shows there’s an “absolute necessity” for a budget deal.
Moody’s was clear about what happens if the stalemate continues: “If persistent, the inability to pass legislation that effectively addresses such policy challenges would mark a weakening of the country’s institutions.”
That warning hit the market immediately. French asset sell-offs have picked up steam since Macron’s June 2024 snap elections, which left the National Assembly in deadlock.
The yield spread between 10-year French and German bonds, a key market risk gauge, hit 89 basis points, nearly double what it was before the election. On Friday, it settled at 81, still the highest in 11 days.
Then came S&P’s unscheduled downgrade, wiping out France’s average double‑A rating across all major credit agencies. That triggered forced selling among investment funds with tight rating criteria. Others scrambled to rewrite their investment rules just to keep holding French bonds.
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