Published on 13th September 2025
Introduction
France had its credit rating cut from AA- to A+ by the Fitch credit rating agency on 12th September 2025. This is not the disaster it may appear to be at first sight, because all the other four agencies approved by the European Union (EU) still rate France’s bonds at a higher level.
Nevertheless, this change illustrates France’s difficulties in operating within a straitjacket, having surrendered its sovereignty for the purposes of Economic and Monetary Union.
‘Sovereign bonds’ is a term that EU institutions wrongly persist in using for the bonds of Eurozone member states. Eurozone member states are sub-sovereigns, having no more financial and economic autonomy than Arkansas or Maine.
Loss of economic sovereignty to the EU
France’s loss of economic sovereignty is illustrated by its obligations to adopt EU regulations, and to comply with EU competition law, and by its lack of freedom to strike its own international trade deals. Each of these areas offers a lever to a country in the economic doldrums to prise itself out of its predicament.
Loss of monetary sovereignty to the European Central Bank (ECB)
The rights to set interest rates and to manage the money supply have been ceded to the ECB. The Banque de France, France’s member of the European System of Central Banks, has to dance to the tune of the ECB rather than to that of the French Finance Ministry.
The foreign exchange rate with France’s main European trading partners is fixed at 1-to-1 as they all use the same currency. Any actions on France’s part could only affect its exchange rate with the UK, a fewer smaller European nations, and the rest of the world, but it has ceded to the ECB the control of the main levers for managing the euro’s exchange rate.
The sole meaningful areas remaining within France’s remit are taxation levels, and debt levels.
Debt level and exiting the euro
The debts in euro of Eurozone member states cannot be termed ‘sovereign’ because none is the currency’s sole user, and because each one has surrendered the operation of the euro’s monetary policy tools to the ECB.
Every Eurozone member state that has run into difficulties has done so because of its elevated debt level. The pointless discussion about leaving the euro needs to be put to bed: a Eurozone member state could only leave the euro and remain in the EU if the euro ceased to exist i.e. if all the others left at the same time and re-adopted a national currency.
Any attempt by a single exiting member state to redenominate its national debt from the euro into its new national currency would be struck down through the European courts: those courts would retain jurisdiction over the matter if the exiting Eurozone member state remained an EU member state.
The national debt of the exiting member state would thus remain in euro. The euro would become for it a foreign currency, rather than a shared-use currency. That would exacerbate the problems that had led it to exit the euro in the first place. Financial markets being what they are, even higher interest rates would be demanded on the bonds in the new national currency which the exiting member state would begin subsequently to issue. The exchange rate between the euro and the new national currency could not fail to be adverse. Exiting the euro but remaining within the EU is not a viable option and should not be discussed as if it were.
The only option left on the table would be to do a ‘Brexit-instant’, over a weekend, and attempt to restore a national currency and hope investors would not dump the bonds in the new national currency that they would be pressed into taking instead of their ones in euro.
Immediate impact of Fitch’s downgrade on France
There is unlikely to be an immediate and severe negative impact of Fitch’s downgrade. Fitch is one of five rating agencies approved by the EU. France retains its higher rating from the other four, for the time being at least.[1]
France’s bonds continue to sit in ‘Credit Quality Step 1’ of the ECB’s ‘Eurosystem credit assessment framework’
France’s bonds remain classified in ‘Credit Quality Step 1’, the highest level of reliability for Eurosystem borrowing and lending operations, and for requirements for banks to hold High-Quality Liquid Assets.[2]
However, France now has one toe in ‘Credit Quality Step 2’ thanks to the Fitch downgrade.
What would it take for France to slide into ‘Credit Quality Step 2’?
All four of the other agencies would have to follow Fitch. Indeed, DBRS Morningstar rate France at AA High, the equivalent of AA+ in the Fitch, Standard and Poor’s, and Scope systems, and Aa1 in Moody’s. It would take three downgrades, not one, by DBRS for France to fall into ‘Credit Quality Step 2’, by which time other agencies might be rating France at A- or even BBB+.
This demonstrates one of the fault lines in the arrangements underlying the euro: France has five strikes before it is out.
The EU’s ‘Guideline of the ECB 2015/510’ states, in Chapter 2 Article 82.1.a regarding marketable assets (which France’s bonds are), that a bond need only have one rating for the asset to rank within the respective ‘Credit Quality Step’, which can either be achieved via a bond being rated by one agency only, or via its being rated by several, in which case the highest rating is the operative one (Article 84.a.2).
The ECB expanded the list of approved agencies by adding Scope Ratings regarding marketable assets as of 16th December 2024, but it did not amend Chapter 2 of 2015/510. The ECB thereby permitted a minor dilution of the strength 2015/510, which was already weak. An issuer now has five shots at getting or retaining a given rating level, rather than four, which is important when it is the ‘first best’ rating that counts.
Will Fitch’s downgrade affect ‘haircuts’?
‘Haircuts’ are the method by which the ECB adjusts the face value of a bond downwards to its value as security for Eurosystem borrowing and lending. The ‘credit quality step’ in which the bond sits is an indirect component in the calculation of the size of the ‘haircut’: some of the same data as is used to calculate the haircut is used in in determining a credit rating, but the credit rating does not directly dictate the haircut.
A ‘haircut’ calculation needs also to consider factors like the maturity date of the asset and its historical price volatility.
This is made clear in the ECB’s Occasional Paper 312 of March 2023 entitled ‘The valuation haircuts applied to eligible marketable assets for ECB credit operations’.
The factors that led to Fitch’s announcement will have already been in play in determining the haircuts on France’s bonds. Indeed, a very cursory scan of the ECB’s listing of eligible assets showed haircuts on France’s bonds to be already within the same range of those of Slovakia, which is rated A+.[3] The bonds identified for France had haircuts ranging from 0.5% to 5%, whereas those identified for Slovakia had haircuts ranging from 0% to 6%.
Marketplace response to the downgrade
The key question is how institutional investors will respond to the downgrade, and what are the potential knock-on impacts of that response.
The customary response of institutions would be to alter their investment criteria in ways that may seem innocuous if it were only one institution doing it:
- Mild reduction in the amount that can be held in portfolio;
- Cut the maximum final maturity of bonds that can be held;
- Avoid individual bonds which have a high haircut, inferring that they are more volatile.
These moves, if repeated across the market, would have the following impacts:
- Reduce the market appetite for new bonds in longer maturities;
- Compel France to make more new issuance in shorter maturities, increasing its refinancing risk;
- Reduce the liquidity in both existing longer-dated issues, and in issues with higher haircuts (which could be one and the same issues);
- Increase the volatility of both existing longer-dated issues, and issues with higher haircuts;
- Increase the yields on both existing longer-dated issues, and issues with higher haircuts;
- Cause the ECB’s haircut calculation methodology to further increase the haircuts;
- Reduce liquidity in cash markets as institutions find they can borrow less against their holdings, because the haircuts are higher;
- Make shorter-term interest rates rise if liquidity is reduced;
- Counteract the transmission into France of the ECB’s monetary policy, in which case the discussion point arises as to whether the ECB should activate its Transmission Protection Instrument, and authorise the Banque de France to buy unlimited quantities of bonds of French issuers.[4]
These developments do not add up to a meltdown: they just make the hole France is digging for itself a little bit deeper and more difficult to climb out of. As such they are indicative of an investor market that notes that an issuer in ‘Credit Quality Step 1’ now has one toe in ‘Credit Quality Step 2’.
Summary and Conclusions
Fitch’s downgrade of France does not betoken France’s collapse nor the imminent collapse of the euro.
It rather highlights the lack of any policy tools open to the French government than cutting its fiscal deficit and its debt, the main lever for doing either being its control of tax rates.
The other main levers of economic and financial management have been ceded to the EU and ECB for the purpose of Economic and Monetary Union.
[1] AA- from Standard & Poor’s and Scope; Aa3 from Moody’s; AA (High) from DBRS Morningstar, accessed on 12 September 2025 from https://www.aft.gouv.fr/en/frances-credit-ratings
[2] https://www.ecb.europa.eu/mopo/coll/risk/ecaf/html/index.en.html accessed on 12 September 2025
[3] https://www.ecb.europa.eu/mopo/coll/assets/html/list-MID.en.html – uncompressed full database downloaded on 12 September 2025
[4] https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr220721~973e6e7273.en.html accessed on 13 September 2025