In the bond market, governments and companies are classified into two main categories: Investment Grade (from AAA to BBB) and High Yield (from BB onwards).
One might therefore think that everything is fine as long as you are in the former category. But institutional investors often prefer AA and AAA bonds. By losing its double A rating, France has crossed an important threshold, which in theory excludes it from a number of mandates.
However, France remains the second-largest economy in the eurozone (in other words, the ECB will be there if anything goes wrong) and has a deep and liquid debt market. These are all reasons that may prompt investors to hold on to their French debt, despite France losing its AA rating.
BlackRock and State Street have therefore changed the rules of two of their funds to avoid forced sales of French debt. In concrete terms, this involves changing the benchmarks (reference indices). The rules for these are now less strict, meaning that AA is no longer required to be included in these funds.
For institutional investors, the advantage is that they can avoid reducing diversification (by excluding a country) and the transaction costs associated with exiting these bonds. These changes had already been initiated in June, after Fitch downgraded Belgium's rating to A+.
Already a simple A
This type of measure is also being adopted because announcements of rating downgrades are somewhat of a non-event. As we have already pointed out in these columns, the market never waits for the rating agencies, which are therefore more like lagging indicators.
French rates are already higher than those of several eurozone countries that are rated lower than France: Spain, Portugal, Italy, and Greece.
In fact, S&P's downgrade, like Fitch's last month, only confirms what everyone already knows: public finances are drifting and political instability is making any major reform more difficult.
If there is one conclusion to be drawn from the sequence of Sébastien Lecornu's resignation and reappointment, it is that the most likely path to the adoption of a budget for 2026 is that of a small reduction in the deficit. The Prime Minister has already conceded to the left that the pension reform will be suspended.
This week, members of parliament began examining the draft finance bill in committee. While the government had aimed to reduce the deficit from 5.4% in 2025 to 4.7% in 2026, this scenario now seems unlikely. S&P expects a deficit of 5.3% in 2026, while Fitch even predicts an increase to between 5.5% and 5.6%.
