Fitch revises France's outlook to 'negative' on worsening debt dynamics

Oct 30 (Reuters) - Credit ratings agency Fitch on Friday revised France's outlook to "negative" from "stable", warning that deteriorating fiscal conditions and political fragmentation are undermining debt stabilization prospects.

The agency pointed to weaker growth, higher borrowing costs and a wider deficit since its August review, compounded by a fractured political landscape that is making sustained fiscal consolidation harder to deliver.

The French economy unexpectedly shrank in the third quarter, while October inflation accelerated to the highest level since late 2023, due to what Economy Minister Roland Lescure described as an unprecedented mix of external and internal shocks.

The outlook revision adds to pressure on the government ahead of more planned protests this weekend, underscoring the political challenges of implementing spending cuts and deficit-reduction measures.

French 10-year yields hit their highest since 2002 last week at more than 5.14%, rising more sharply than those of most peers, reflecting greater sensitivity to shifts in market confidence amid concerns over France's fiscal trajectory, struggle to pass a budget and social unrest.

The move heightens the risk of a future downgrade for the euro zone's second-largest economy, which has already seen its borrowing costs climb sharply, weighing on its debt outlook.

"The emerging policy debate ahead of the presidential election has not materially strengthened Fitch's confidence in the prospects for durable deficit reduction that could lead to debt stabilization," the agency said.

Fitch now sees France's debt-to-GDP ratio climbing to around 124% by 2028 from 115.7% in 2025, while flagging that the country's large, diversified economy, strong institutions and euro area membership continue to anchor the rating.

The action comes just days after Moody's spared France a downgrade, keeping its rating at "Aa3" with a "negative" outlook, citing expectations that a deficit-reduction budget for 2027 will be adopted and that financing pressures and social tensions will ease in the coming months.

(Reporting by Aatrayee Chatterjee in Bengaluru; Editing by Diti Pujara)